An Approach to Show and Repeat the Winner's Curse in Game Theory: The Cascade Effect in a Private Value Environment of B2B Auctions via the Beer Distribution Game

Companies are forced within a competitive market environment to overstep their own calculatory limits running the risk of a winner's curse because not winning in a business-to-business (B2B) auction contest might cause adverse financial consequences like negative economies of-scale for the company or a lowering of the market share. To ease simulation in logistics, the Massachusetts Institute of Technology (MIT) developed in the 1970s the beer distribution game to show the bullwhip effect in logistics. On the basis of such a successful structural approach, the beer auction game was developed in post-doctoral research together with industrial players to show, analyze and easily repeat the cascade effect in combination with the winner's curse which shows the drop of margin in several steps up and into negative values due to future expectations of business. Additionally, it is demonstrated first time that the winner's curse can also take place in private-value and not only common-value auctions due to endogenous and exogenous probability costs.