Magic Number Bidding

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In "magic number bidding" an auctioneer colludes with a bidder ("the scammer"). The scammer secretly informs the colluding auctioneer of the scammer's reservation price, the lowest amount for which it would still be profitable to perform the work in question. The colluding auctioneer then defers "reading" the scammer's bid until last. If the scammer's reservation price is less than the minimum bid, the auctioneer says that the scammer's bid was a small amount less than the prior minimum bid. The scammer thus wins a profitable bid. If the scammer's reservation price is more than the minimum bid, the auctioneer says that the scammer's bid was something more than the minimum bid, thus ensuring that the scammer never enters a losing bid. The scammer thus profits to the extent of any positive difference between the minimum bid of other bidders and the scammer's reservation price.
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Contributed by: Seth J. Chandler (March 2011)
Open content licensed under CC BY-NC-SA
Snapshots
Details
Snapshot 1: classic magic number bidding in which the auctioneer deliberately announces a losing bid from the scammer because scammer's reservation price is more than the minimum bid
Snapshot 2:classic magic number bidding in which the auctioneer deliberately announces a winning bid from the scammer because scammer's reservation price is less than the minimum bid
Snapshot 3: the scammer deflects attention by announcing its bid fairly early, but fails to get the contract as a result
Magic number bidding is generally a criminal act.
Classic magic number bidding is described in I. Ayres, Super Crunchers, New York: Bantam Books, 2007. Its detection is the subject of the paper, A. Ingraham, "A Test for Collusion Between a Bidder and an Auctioneer in Sealed-Bid Auctions", Contributions to Economic Analysis and Policy, 2005.
Permanent Citation
"Magic Number Bidding"
http://demonstrations.wolfram.com/MagicNumberBidding/
Wolfram Demonstrations Project
Published: March 7 2011