The positive auction

[Sorry, I hit publish prematurely. I’ll be updating this and correcting the errors as we go.]

In 2023, I developed a new idea that transforms an old way of doing commerce.

In traditional auctions, there are rounds of bidding and the high bidder pays to get the prize. The last bid is the amount paid, and no one else is charged anything.

This is an interesting ‘game’ in which all participants are able to express their desire for the item in monetary terms. In an efficient auction, the price paid will represent the highest utility among the bidders, with no one feeling remorse–including the seller–because the “market has spoken.”

Over time, these sorts of auctions aren’t actually as efficient as they seem. This is why other times of auctions have evolved. These include:

The three other common types of auctions are (via Wikipedia):

1. Dutch Auction: In a Dutch auction, the auctioneer starts with a high asking price, which is gradually lowered until a bidder accepts the price, winning the item. Multiple units of the same item can be sold simultaneously, with the price decreasing until all units are sold or until a bidder accepts the current price.
2. Sealed-Bid Auction: In this type of auction, bidders submit their bids privately without knowing the bids of others. Once all bids are received, they are opened simultaneously, and the highest bidder wins the item. This format encourages bidders to submit their true valuation of the item.
3. Vickrey Auction: Also known as a second-price sealed-bid auction, this format is similar to a sealed-bid auction, but the winner pays the second-highest bid rather than their own bid. This encourages bidders to bid their true valuation, as they won’t pay more than what they believe the item is worth.

When bidders have an understanding of the nature of the bidders in the room as well as their options, bidding is skewed. For things like spectrum, this can cost the seller billions of dollars.

I chose to address the problem of charity auctions. Often run at galas, they depend on a combination of status and alcohol to generate high bids for items that the buyers might not have imagined wanting to purchase before the event began. As a result, the results are often quite disappointing to the seller, often a worthy cause.

The positive auction transforms the dynamics of a charity auction by changing two elements:

Most profoundly, every bid is a donation.

Bidding begins at $10 and increments by ten dollars per bid. Bidders are not permitted to skip a step.

The total raised increases exponentially.

Specifically

S=(n/2)​(2a+(n−1)d)

S is the final sum. a is the first number and d is the increment.

In practice, then, the bidding results look like this:

The organizer of the auction can offer free bids to bidders at no cost to the seller. In fact, free bids can actually increase the amount raised.

The second innovation is incorporating “free bids” into the auction.

For example, a free bid could be rewarded to anyone who recruits someone who bids in an auction. When used, the free bid ratchets up the auction, meaning that the next bid will be higher. Even if a free bidder wins the auction, they haven’t decreased the amount of money raised.

In practice, a positive auction creates an unstable equilibrium. If we consider an auction with 150 bids, the winner pays only $1,495 but gets an item that might be worth $100,000. It’s difficult to look away from this gap without exploring it.

We’re taking the dynamics of positive auctions and building GOODBIDS around it, providing a tool for worthy causes to raise money.

Positive auctions paper (via Claude.ai):

Abstract:
This paper introduces a novel auction format, the positive auction, designed to address the inefficiencies and suboptimal outcomes often associated with traditional charity auctions. By incorporating two key innovations—treating every bid as a donation and introducing free bids—the positive auction model aims to increase total funds raised for charitable causes while maintaining an engaging and competitive bidding environment.

1. Introduction
Charity auctions play a vital role in generating funds for worthy causes. However, traditional auction formats often fail to maximize the potential for fundraising, as they rely heavily on factors such as status and impulsive bidding behavior. This paper presents the positive auction model, a transformative approach to charity auctions that seeks to address these shortcomings and optimize the fundraising process.

2. The Positive Auction Model
2.1 Every Bid as a Donation
The core principle of the positive auction is that every bid placed by a participant constitutes a donation to the charitable cause. Bidding commences at a fixed starting price and increases by a predetermined increment with each subsequent bid. Participants are required to follow the incremental bidding sequence, ensuring a structured and transparent process.

The total funds raised through a positive auction can be calculated using the following formula:

_S_\=(n/2)​(2_a_+(_n_−1)_d_)

Where:
_S_ = total sum raised
_n_ = number of bids
_a_ = starting bid amount
_d_ = bid increment

This formula demonstrates the exponential growth potential of the positive auction model, with total funds raised increasing significantly as the number of bids grows.

2.2 Free Bids
The positive auction introduces the concept of “free bids” to further enhance the fundraising potential. Free bids are awarded to participants based on predefined criteria, such as recruiting additional bidders to the auction. These free bids serve to increase the overall number of bids placed, driving up the total funds raised without any additional cost to the charitable organization.

3. Unstable Equilibrium and Incentives
The positive auction creates an unstable equilibrium, where the winning bidder may secure an item of substantial value for a relatively low final bid price. This disparity between the item’s perceived value and the winning bid price serves as a powerful incentive for participants to continue bidding, as the potential for securing a high-value item at a bargain price is a compelling prospect.

4. Practical Application: GOODBIDS
The positive auction model has been implemented through the development of GOODBIDS, a platform designed to facilitate fundraising for charitable causes. By providing a user-friendly interface and automating the bidding process, GOODBIDS aims to make the positive auction model accessible to a wide range of organizations and individuals seeking to maximize their fundraising efforts.

5. Conclusion
The positive auction model represents a significant advancement in the field of charity auctions, offering a novel approach to maximizing fundraising potential while maintaining an engaging and competitive bidding environment. By treating every bid as a donation and introducing the concept of free bids, the positive auction creates an unstable equilibrium that incentivizes participants to continue bidding, ultimately leading to increased funds raised for worthy causes. The development of platforms like GOODBIDS further enhances the practical application of this innovative auction format, promising to revolutionize the landscape of charitable fundraising.

March 5, 2024