A first-price sealed-bid auction (FPSBA) is a common type of
auction
An auction is usually a process of buying and selling goods or services by offering them up for bids, taking bids, and then selling the item to the highest bidder or buying the item from the lowest bidder. Some exceptions to this definition ex ...
. It is also known as blind auction. In this type of auction, all bidders simultaneously submit sealed bids so that no bidder knows the bid of any other participant. The highest bidder pays the price that was submitted.
Strategic analysis
In a FPSBA, each bidder is characterized by their monetary valuation of the item for sale.
Suppose Alice is a bidder and her valuation is
. Then, if Alice is rational:
*She will never bid more than
, because bidding more than
can only make her lose net value.
*If she bids exactly
, then she will not lose but also not gain any positive value.
*If she bids less than
, then she ''may'' have some positive gain, but the exact gain depends on the bids of the others.
Alice would like to bid the smallest amount that can make her win the item, as long as this amount is less than
. For example, if there is another bidder Bob and he bids
and