Rules and the logic of escalation
In Shubik's (1971) dollar auction, bids rise in five-cent increments; the winner receives the dollar, but both the top and second bidders pay their last bids. At first it looks like a chance to get a dollar cheaply, but whoever sits in second place stands to lose their bid outright, so there is always an incentive to bid a little more and move into first. Even after bids pass a dollar, the runner-up reasons that paying a bit more limits the loss, and the escalation continues. Shubik reported that at cocktail parties the auction often climbed to between three and five dollars.
Game-theoretic analysis
O'Neill (1986) showed that when budgets are capped and commonly known, backward induction yields an equilibrium in which the first bidder makes one appropriately sized bid and the auction ends, and he interpreted the game as a model of international escalation. Leininger (1989) analyzed how sensitive this equilibrium is to budget size and the scope for cooperation. In auction theory, the dollar auction is a variant of the all-pay auction, in which every bidder pays, and Baye, Kovenock and de Vries (1996) showed that in equilibrium under complete information the rents can be fully dissipated. Its structure also resembles the war of attrition.
Escalation of commitment and behavioral research
Teger (1980) explained continued escalation in experiments as a shift from the initial economic motive to saving face and beating the opponent. Staw's (1976) work on escalation of commitment, Arkes and Blumer's (1985) sunk cost experiments and Brockner and Rubin's (1985) research on entrapment likewise show how resources already invested pull in further investment. Bazerman and Neale (1992) described MBA classes in which an auctioned $20 bill went for hundreds of dollars, and Murnighan (2002) reported an extreme case of escalation. More recently, Platt, Price and Tappen (2013) and Augenblick (2016) analyzed the roles of risk preferences and the sunk cost fallacy in penny auctions, where bidders pay a fee for every bid.
FAQ
- What is the dollar auction in simple terms?
- A dollar is auctioned off, but the runner-up also has to pay their bid. Since losing means losing money, bidders keep raising, and they often end up paying much more than a dollar.
- Why do people bid more than a dollar?
- Finishing second means losing everything you bid, so paying a little more to win looks like the smaller loss. Over time, pride and the urge to beat the other bidder add fuel and the escalation continues.
Sources reviewed: 2026-10-26
References
- Shubik, M. (1971). The dollar auction game: A paradox in noncooperative behavior and escalation. Journal of Conflict Resolution, 15(1), 109–111.
- Teger, A. I. (1980). Too Much Invested to Quit. New York: Pergamon Press.
- O'Neill, B. (1986). International escalation and the dollar auction. Journal of Conflict Resolution, 30(1), 33–50.
- Leininger, W. (1989). Escalation and cooperation in conflict situations: The dollar auction revisited. Journal of Conflict Resolution, 33(2), 231–254.
- Staw, B. M. (1976). Knee-deep in the big muddy: A study of escalating commitment to a chosen course of action. Organizational Behavior and Human Performance, 16(1), 27–44.
- Arkes, H. R., & Blumer, C. (1985). The psychology of sunk cost. Organizational Behavior and Human Decision Processes, 35(1), 124–140.
- Brockner, J., & Rubin, J. Z. (1985). Entrapment in Escalating Conflicts: A Social Psychological Analysis. New York: Springer.
- Bazerman, M. H., & Neale, M. A. (1992). Negotiating Rationally. New York: Free Press.
- Murnighan, J. K. (2002). A very extreme case of the dollar auction. Journal of Management Education, 26(1), 56–69.
- Baye, M. R., Kovenock, D., & de Vries, C. G. (1996). The all-pay auction with complete information. Economic Theory, 8(2), 291–305.
- Platt, B. C., Price, J., & Tappen, H. (2013). The role of risk preferences in pay-to-bid auctions. Management Science, 59(9), 2117–2134.
- Augenblick, N. (2016). The sunk-cost fallacy in penny auctions. Review of Economic Studies, 83(1), 58–86.