Profit mechanisms in penny auctions: Unraveling the impact of sunk costs

Abstract

This study provides a distinctive perspective on the intricate dynamics of penny auctions, which are characterized by incremental bid costs and potential sunk costs, constituting a significant area of research in existing literature. Our research takes a unique approach by specifically delving into the profit mechanisms inherent in penny auctions, with a focused examination on the profound impact of the sunkcost fallacy on bidder behavior. To achieve this, we employ a custom model built upon the structural elements proposed in previous works, aiming to scrutinize the dynamics of bid costs and bid increments. In the course of our investigation, we uncover counterintuitive strategies employed by bidders that have a substantial impact on auctioneer profitability. This revelation contributes to a deeper understanding of bidder decision-making processes and their consequential influence on auction outcomes. By shedding light on these nuanced aspects, our study provides valuable insights that extend the current understanding of the intricate dynamics governing penny auctions. The implications of our findings have relevance not only for academic researchers seeking to expand their knowledge in this domain but also for industry professionals involved in auction platforms, offering practical considerations for optimizing profitability in this unique auction format.