Game Analysis and Bidding Strategy Optimization in First-Price Sealed-Bid Auctions: A Bayesian Nash Equilibrium Perspective

Zhiyuan Guo

doi:10.54097/4s639295

Authors

Zhiyuan Guo Faculty of Humanities and Social Sciences, The University of Nottingham, Ningbo, China, Ningbo, 315100, China

DOI:

https://doi.org/10.54097/4s639295

Keywords:

First-Price Sealed-Bid Auction, Bayesian Nash Equilibrium, Optimal Bidding Strategy, Bid Shading, Winner’s Curse, Allocative Efficiency.

Abstract

The first-price sealed-bid auction (FPSB) is a prevalent mechanism for selling high-value assets. However, its susceptibility to inefficiencies like the winner’s curse and strategic underbidding can deter market participation and lead to revenue fluctuations, as observed in recent global auction market trends. This paper aims to derive optimal bidding strategies that approximate the Bayesian Nash Equilibrium (BNE), thereby mitigating these inefficiencies. Through a case study of a 1961 Alaska oil and gas lease auction, this study identifies the format’s advantage in deterring collusion alongside its problems of pricing inaccuracy and resource misallocation. To solve these problems, two solutions are provided in this paper. Provided the cumulative distribution expected value of bidders follows the cubic function, a function that can achieve the Bayesian Nash Equilibrium is provided. This paper also provides different strategies based on the genre of the auction item. Bidders can shade more when bidding for artworks and antiques, and shade less when bidding for real estate and gas fields.

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