The dollar auction is a non-zero sum sequential game explored by economist Martin Shubik to illustrate a paradox brought about by traditional rational choice theory in which players are compelled to make an ultimately irrational decision based completely on a sequence of apparently rational choices made throughout the game.
The setup involves an auctioneer who volunteers to auction off a dollar bill with the following rule: the bill goes to the winner; however, the second-highest bidder also loses the amount that they bid, making them the biggest loser in the auction. The winner can get a dollar for a mere 5 cents (the minimum bid), but only if no one else enters into the bidding war.
However, entering the auction with a low bid may result in a problematic outcome. For instance, a player might begin by bidding 5 cents, hoping to make a 95-cent profit. They can be outbid by another player bidding 10 cents, as a 90-cent profit is still desirable. Similarly, another bidder may bid 15 cents, making an 85-cent profit. Meanwhile, the second bidder may attempt to convert their loss of 10 cents into a gain of 80 cents by bidding 20 cents, and so on. Every player has a choice of either paying for nothing or bidding 5 cents more on the dollar.