BazermanMoore

Bounded Awareness in Auctions 59
the nuclear arms race, in the failure of strategic alliance, and in overharvesting and
overfishing crises.
One of the most common managerial applications of prisoner dilemma games is to
price setting. Suppose that two companies that sell the same product would be better off
if they both set high prices than if they both set low prices. Because of market share
considerations, however, each would be better off charging a low price, regardless of the
pricing strategy selected by the other party. If the other company keeps its prices high,
then it is best to lower prices to gain market share. If, on the other hand, the other company
reduces its prices, then it is best to lower prices, in order not to lose market share.
Both companies clearly would be better off if both charged high prices than if both
charged low prices. The interesting aspect of this story is that many negotiation teachers
present it as a model example of how managers can create value through cooperation.
But, notice that value is created only for the companies involved; the effect of
higher prices on consumers remains outside the bounds of the problem. In many situations,
parties in a negotiation gain value at the expenses of those outside of the bounds
of the defined problem.
BOUNDED AWARENESS IN AUCTIONS
Consider the following auctions:
Your consulting firm is trying to hire a young, highly regarded MBA student from a prestigious
university. Many other organizations are also interested in this apparently talented
individual. In fact, your firm seems to be competing against these other firms, motivating
you to sweeten the deal with a big signing bonus. Finally, the MBA accepts your offer. As
she signs on the dotted line, you wonder if her productivity will exceed the high price of
hiring her.
Your company has placed a bid on a firm that has suggested it will gladly be acquired by
the highest bidder. The actual value of the target firm is highly uncertain; even the firm
itself does not know its real worth. With at least a half-dozen firms pursuing the target,
your bid turns out to be the highest. Your offer is accepted. Should you break out the
champagne?
You just purchased the most beautiful rug you have ever seen in an eBay auction. There
were a lot of bids on the rug, showing that you were not alone in recognizing its value. As
you anxiously await delivery of the rug, you start to wonder: Did you get a good deal?
In each of these scenarios, a naïve analysis would suggest that you should be glad to
have won the competitive situation. However, Bazerman and Samuelson (1983) argue
that you may have just become the most recent victim of the ‘‘winner’s curse’’ in competitive
bidding. In a two-party negotiation between buyer and seller, the winner’s
curse usually occurs when the buyer fails to consider the perspective of the seller. In
auctions, the winner’s curse typically results from the winning bidder’s failure to consider
the implications of bidding higher than his or her competitors—all of whom are at
the same information disadvantage relative to the seller.
Bazerman and Samuelson (1983) argue that as the highest bidder, you may have
significantly overestimated the actual value of the commodity being sold. Figure 3.2