Important examples of escalation are easy to find in political science, such as the buildup of American troops in Vietnam during the 1960s and the arms race of the 1960s, 1970s, and 1980s, to mention just two. Such escalatory behavior is driven at least in part by a desire to keep previous investments from having been wasted. In this chapter we consider a model of escalatory behavior introduced by the economist Martin Shubik and extensively analyzed by Barry O’Neill. This model is known as the dollar auction.

Regular auctions do not elicit escalatory behavior since one can always quit and be back where one started. In the dollar auction, however, the rules are changed so that when the bidding for the prize (typically a dollar—hence the name) is completed, both the highest and the second-highest bidder pay the auctioneer what he or she bid, although only the highest bidder gets the prize. Hence, it is worse to have bid and lost than never to have bid at all. An appreciation of the escalatory nature of the dollar auction is certainly enhanced by the opportunity to watch a group of one’s (unsuspecting) peers actually involved in the bidding process. Remarkable though it may seem, winning bids typically exceed one dollar, with the auctioneer often pocketing more than three dollars, and having to give out only one dollar.


Terminal Node High Bidder Game Tree English Auction Rational Play 
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© Springer Science+Business Media, LLC 2008

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