On Competitive Bidding

Abstract

This paper develops a model for describing some aspects of competitive bidding. The motivating purpose of the model was that of formally examining the hypothesis put forward by Capen, Clapp and Campbell: In a competitive oil and gas lease sale, or indeed in any bidding situation in which the ultimate value of the object to be won is subject to uncertainty, the highest bidder tends to be one who has overvalued the prize. As a result, any company tends to win tracts (or prizes) which it has overvalued and tends to lose those which it has undervalued. Therefore, even if the pre-sale value estimates, on the average, turn out to be correct for each of the tracts bid on, the estimates for those that are actually won will tend to prove to have been too high. The model developed not only supports the hypothesis as set forth, but also establishes its validity much more generally.

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