Optimal bidding in auctions from a game theory perspective

• Published in: European journal of operational research Vol. 248; no. 2; pp. 347 - 371
• Main Author: Lorentziadis, Panos L.
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 16.01.2016; Elsevier Sequoia S.A
• Subjects: Asymmetry; Auction bidding; Auctions; Behavioral decision theory; Bids; Collusion; Game theory; Irrationality; Studies; Collusion; Irrationality; Asymmetry; Game theory; Auction bidding
• ISSN: 0377-2217; 1872-6860
• DOI: 10.1016/j.ejor.2015.08.012

•We review recent advances in auction theory from a game theoretic perspective.•We consider estimation issues and the effect of asymmetry on bidding.•We examine how auctions are embedded in the market.•We investigate bidding when players break the rules.•We expand the perspective by incorporating irrationality in bidding. The game theoretic perspective in auction bidding has provided a powerful normative framework for the analysis of auctions and it has generated an impressive volume of research contributions. Tracing this research, we review key recent advances, which have greatly expanded our understanding of the operation of auctions and produced a more accurate analysis of mechanism design and optimal bidding. We follow various experimental studies which have shown that the predictive power of auction theory remains in many cases limited. For this reason, we concentrate on research themes, which enhance the applicability of auction theory leading to more realistic descriptions of bidding behaviors. We identify important innovations, which expand the environment of auction bidding and carry us beyond rational decision making. We conclude providing directions of future research and discussing their implications.