Bid shading - Wikipedia

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In an auction, bid shading describes the practice of a bidder placing a bid that is below what they believe a good is worth.

Bid shading is used for one of two purposes. In a common value auction with incomplete information, bid shading is used to compensate for the winner's curse. In such auctions, the good is worth the same amount to all bidders, but bidders don't know the value of the good and must independently estimate it. Since all bidders value the good equally, the winner will generally be the bidder whose estimate of the value is largest. But if we assume that in general bidders estimate the value accurately, then the highest bidder has overestimated the good's value and will end up paying more than it is worth. In other words, winning the auction carries bad news about a bidder's value estimate. A savvy bidder will anticipate this, and reduce their bid accordingly.

Bid shading is also used in First-price Auctions, where the winning bidder pays the amount of his bid. If a participant bids an amount equal to their value for the good, they would gain nothing by winning the auction, since they are indifferent between the money and the good. Bidders will optimize their expected value by accepting a lower chance of winning in return for a higher payoff if they win.

In a first-price common value auction, a savvy bidder should shade for both of the above purposes.

v t e Topics in game theory
Definitions	Congestion game Cooperative game Determinacy Escalation of commitment Extensive-form game First-player and second-player win Game complexity Graphical game Hierarchy of beliefs Information set Normal-form game Preference Sequential game Simultaneous game Simultaneous action selection Solved game Succinct game
Equilibrium concepts	Bayes correlated equilibrium Bayesian Nash equilibrium Berge equilibrium Core Correlated equilibrium Epsilon-equilibrium Evolutionarily stable strategy Gibbs equilibrium Mertens-stable equilibrium Markov perfect equilibrium Nash equilibrium Pareto efficiency Perfect Bayesian equilibrium Proper equilibrium Quantal response equilibrium Quasi-perfect equilibrium Risk dominance Satisfaction equilibrium Self-confirming equilibrium Sequential equilibrium Shapley value Strong Nash equilibrium Subgame perfection Trembling hand
Strategies	Appeasement Backward induction Bid shading Collusion De-escalation Deterrence Escalation Forward induction Grim trigger Markov strategy Dominant strategies Pure strategy Mixed strategy Strategy-stealing argument Tit for tat
Classes of games	Bargaining problem Cheap talk Global game Intransitive game Mean-field game Mechanism design n-player game Perfect information Large Poisson game Potential game Repeated game Screening game Signaling game Stackelberg competition Strictly determined game Stochastic game Symmetric game Zero-sum game
Games	Go Chess Infinite chess Checkers Tic-tac-toe Prisoner's dilemma Gift-exchange game Optional prisoner's dilemma Traveler's dilemma Coordination game Chicken Centipede game Lewis signaling game Volunteer's dilemma Dollar auction Battle of the sexes Stag hunt Matching pennies Ultimatum game Rock paper scissors Pirate game Dictator game Public goods game Blotto game War of attrition El Farol Bar problem Fair division Fair cake-cutting Cournot game Deadlock Diner's dilemma Guess 2/3 of the average Kuhn poker Nash bargaining game Induction puzzles Trust game Princess and monster game Rendezvous problem
Theorems	Arrow's impossibility theorem Aumann's agreement theorem Folk theorem Minimax theorem Nash's theorem Negamax theorem Purification theorem Revelation principle Sprague–Grundy theorem Zermelo's theorem
Key figures	Albert W. Tucker Amos Tversky Antoine Augustin Cournot Ariel Rubinstein Claude Shannon Daniel Kahneman David K. Levine David M. Kreps Donald B. Gillies Drew Fudenberg Eric Maskin Harold W. Kuhn Herbert Simon Hervé Moulin John Conway Jean Tirole Jean-François Mertens Jennifer Tour Chayes John Harsanyi John Maynard Smith John Nash John von Neumann Kenneth Arrow Kenneth Binmore Leonid Hurwicz Lloyd Shapley Melvin Dresher Merrill M. Flood Olga Bondareva Oskar Morgenstern Paul Milgrom Peyton Young Reinhard Selten Robert Axelrod Robert Aumann Robert B. Wilson Roger Myerson Samuel Bowles Suzanne Scotchmer Thomas Schelling William Vickrey
Miscellaneous	All-pay auction Alpha–beta pruning Bertrand paradox Bounded rationality Combinatorial game theory Confrontation analysis Coopetition Evolutionary game theory First-move advantage in chess Glossary of game theory List of game theorists List of games in game theory No-win situation Solving chess Topological game Tragedy of the commons Tyranny of small decisions