A Bluff-Bidding Exercise

J. Patrick Meister

The Journal of Economic Education, 2011, vol. 42, issue 2, 168-174

Abstract: Consider an auction in which one potential buyer wishes to participate, but the other potential buyer would rather the bidding not start. However, once bidding starts, the reluctant firm participates (submits "bluff bids") simply to make the eventual winner pay more. This incentive exists when the marginal effect of the winning bid is to increase a rival's profit. In 2004, AT&T Wireless placed itself for sale in an English auction. Some predicted Vodafone would make bluff bids (to make Cingular pay more. Students experience this sort of activity in the game that this article describes. Students also learn that bluff bidding affects profits of the firms involved and therefore has important implications for stock prices of participating firms.

Date: 2011
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DOI: 10.1080/00220485.2011.555719

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