One of the fundamentals of strategic theory relates to thinking forward and reasoning backwards. The dollar auction is a great example.
So, how do you sell a dollar for more than a $1.00? Take a group of people and offer to auction off your dollar in five-cent bid increments. The high bidder wins, but the second highest bidder, the loser, has to give up their losing bid. You’ll almost always get more than $1.00 for your dollar—guaranteed.
How? Let’s say that you were one of the bidders and you just bid outbid Mary’s $.50 with a bid of $.55. Great deal for a buck, right? Well, if Mary’s not thinking forward and reasoning backward, she’s just thinking about her next move—which is, of course, to outbid you and offer $.60. She’s better off buying a dollar for $.60 than she is losing $.50. So, good move right?
Well, what’s your next move? You’re going to use the same logic and bid $.65. She’ll then bid $.70, and so on. You can see how this will continue.
Here’s where it gets really fun. Now let’s say you just bid $1.00 for the dollar, outbidding Mary’s $.95. Does Mary stop? Is it better for her to bid $1.05 for the dollar (and lose $.05), or lose the bidding war and give up her low bid of $.95? Suddenly, you and Mary are bidding more than $1.00 for that dollar. Until someone comes to their senses, the bidding will keep going.
While this is a simplified model, it does relate to business. Here’s a great example that you’ve probably been involved with yourself. Say you’re in a competition for a contract and the more time (read money) you spend on the proposal, the more likely it is that you’ll win. But if you lose, any amount that you’ve already spent will be lost. See the similarities? There are also plenty of other situations where you can apply this insight.
So, back to the dollar. Your strategy in this game depends on your objective. The key is to think forward and reason backward. Identify your desired outcome, or objective. Anticipate what moves your competition will make. Think about the ways in which it might end. Then reason backward to what you should do now.
Here are a few possible objectives and strategies for the dollar game:
- Objective: You want to make money.
Strategy: Don’t play. Unless you are going to cheat, there is no way to make money.
- Objective: You want to “win” the dollar.
Strategy: Immediately bid $1.00 for it, or if your opponent opens with $.05, bid $1.05. You need to give him no incentive to outbid you. However, you must be pretty confident that he’s not going to act irrationally and be willing to lose a lot more money in order to “win” that dollar.
- Objective: You want to destroy your opponent.
Strategy: If that’s your objective, and you have more money, just keep bidding until he runs out. In order for this to work, however, you have to make sure that you actually do have more money, and that you are totally committed!
There is one way to truly win, of course, and that is to collude with the other bidders. That’s cheating, though, and in business it’s also illegal.
There’s much more to this story, but these are the basics. If you want to try it for yourself, go ahead and auction off a dollar to a group of your friends or family. You’ll probably get at least a free lunch out of it.