Mitigating the Winner's Curse in the Auction Market of a Computer-Assisted Business Gaming Simulation

Abstract

As an alternative to modeling the market, the problem of gaming it in a simulation by an auction mechanism is addressed. A two-market solution, including both a first-bid market and a best-bid market, is proposed to mitigate the winner’s curse, a common affliction of auctions. A computer-assisted gaming simulation with an auction mechanism that incorporates the solution is described. A comparison of simulation results before and after the two-market solution was applied showed an increase in the number of companies founded, and, after initial periods, reductions the winner’s curse, the standard deviation of transaction prices within each period, and the volatility of average transaction prices. The increased pedagogical scope of the two-market solution may by itself suffice to justify the extra programming effort that it entails and the additional demands it places on the participants.