Optimal bidding in auctions of mixed populations of bidders

A mixed population of bidders consists of two asymmetric groups. Members of the first group are game-theoretic players, who maximize their expected profit and incorrectly believe that their opponents act similarly. The second group of bidders adopts an irrational strategy: they either choose their bids randomly following a given probability distribution, in a “naïve” form of bidding, or follow a decision-theoretic approach, maximizing their expected profit under the assumption that all other bids are random. In a sealed bid private-value procurement auction we examine the optimal strategy of a new player, who has perfect knowledge of the structure of the mixed bidder population and enters the auction. The optimal bid of the new bidder is derived when the cost and mark-up follow a uniform distribution in [0, 1]. The effect of the relative size of the group of game-theoretic bidders and the population size on the optimal bid price is established.

► We examine a mixed population of bidders of game-theoretic players and “naive” or decision-theoretic bidders.
► We develop the optimal bidding strategy of a new entrant, who has perfect knowledge about the bidder population.
► We derive the optimal bid, when the underlying distribution of the cost and mark-up is uniform in [0, 1].
► We show that competition is more intense as the size of the game-theoretic group increases.