Investigating the Winner's Curse Based on Decision Making in an Auction Environment

The construction industry frequently grapples with the winner’s curse, a phenomenon where contractors secure projects by underbidding costs, ultimately resulting in negative profit margins and long-term financial instability. By utilizing multiplayer online auction simulations and System Dynamics modeling, research into this behavior reveals that the pressure to maintain market share and the desire to avoid idle resources often drive firms toward overly aggressive, low-margin bidding strategies. These decisions are exacerbated by incomplete information and inaccurate cost estimations, which cloud the assessment of project risks and competitive dynamics.

The findings indicate that corporate success is not merely a product of winning bids but rather the result of balancing precise objectives with realistic profit margins. Firms that prioritize consistent activity and maintain flexibility in response to competitor behavior demonstrate greater resilience than those focused solely on aggressive market penetration. While strategic bidding may offer short-term relief during periods of low demand, it frequently serves as a precursor to financial failure when not supported by a fundamental, long-term corporate strategy that accounts for the inherent risks of the auction environment.

These simulation-based studies validate the use of database-driven business games as robust tools for analyzing complex human decision-making and auction behavior. By bridging the gap between theoretical game theory and practical construction management, these models provide critical insights into how contractors navigate competitive pressures. Future investigations into alternative auction mechanisms, such as the Vickrey auction, are essential to further refine bidding strategies and develop more effective methods for mitigating the systemic risks associated with the winner’s curse across the global construction sector.