In auction theory, jump bidding is the practice of increasing the current price in an English auction, substantially more than the minimal allowed amount.
At first glance, jump bidding seems irrational.
By bidding higher, the bidder gives up the opportunity to win the item at a lower price.
However, in practice buyers increase the displayed price much more than the minimal allowed increment.
Buyers may even sometimes offer an increase on their own high bid, seemingly irrationally.
Consider two veteran bidders, that compete with each other many times in English auctions.
Each time, the higher-value bidder wins the item and pays the lower-value to the seller.
Such cooperation could be very beneficial to both bidders in the long run.
The problem is, it cannot be enforced, because both bidders have an incentive to say that their value is higher than it really is.
Two bidders, Xenia and Yakov, participate in an auction for a single item.
This is a common value auction with the following parameters, where A B and C are independent uniform random variables on the interval (0,36): The auction proceeds in two stages: We show that there exists a symmetric perfect Bayesian equilibrium in which each bidder jumps if-and-only-if his value is above a certain threshold value, T. To show this, we proceed backwards.
Assume that Yakov's strategy is to jump if-and-only-if his signal is at least T. We calculate Xenia's best response.
The outcome of this PBE is substantially different than that of a standard Japanese auction (with no jump option).
- the symmetric PBE strategy is to jump if-and-only-if the signal is at least 36.
In contrast, in a simple Japanese auction, Xenia will stay up to her value of 33, so Yakov will win and pay 33.
This outcome seems counter-intuitive from two reasons: Jump-bidding is a very crude form of communication: it does not communicate my actual value, it only signals that my value is above a certain threshold.
For example, suppose the initial price is 0, the minimal increment is 2 and the values are 9 and 10.
[3] Some authors claim that jump-bidding reduces the seller's revenue, since the signaling allows bidders to collude and reduce the final price.