Dollar Auctions and Deadly Games

Some years ago during the Kargil episode, I had analysed the conflict between India and Pakistan over Kashmir as a dollar aution (DA)and written a piece called Dollar Auctions and Deadly Games.

I believe that the model has interesting implications and is worth pondering. The DA game involves the auctioning of a dollar bill similar to an ordinary auction where the winner gets the dollar but with the special requirement that the second highest bidder has to pay the second highest bid amount to the auctioneer.

Wars resemble DAs since the losing side in a war does not get the ‘prize’ but has to pay the cost of engaging in war. In other words, in war, all costs incurred are sunk costs.

The DA suggests that to reduce, or even totally eliminate sunk costs, one side has to make a credible commitment to winning the auction at any cost before the auction starts. That sends a signal to the other players that there is little point in bidding against someone who has made a credible commitment to win regardless of costs. Of course, sending that signal itself would incur some cost and the cost of signaling has to be less than the benefit of winning the auction. There has to be some cost in signaling because otherwise the signal will be disregarded as cheap talk and competitors will enter the game and bid up the price of the dollar.

The DA is a general purpose model which is applicable in a wide range of situations we commonly face. It is a mental model worth keeping in one’s tool-bag.