Litigation as a dollar auction (first draft)

F.E. Guerra-Pujol
***
Background
Martin Shubik introduced the dollar auction game in a short paper published in 1971
in The Journal of Conflict Resolution. In the original version of Shubiks game, an
auctioneer (or banker) auctions off a dollar bill (or other fixed prize) to the highest
bidder. In addition, both the highest bidder and the second-highest bidder must pay
their respective bids to the auctioneer/banker. (Shubik, 1971, p. 109.) But the dollar
auction is not just a parlor game (ibid.) or an outlier in the pantheon of game
theory models, for scholars have discovered real-life dollar auctions in a wide
variety of settings (see generally Teger, 1980), including mergers and acquisitions
(Murnighan, 2002, p. 65), free agency in sports (ibid., p. 66) the film industry
(Thaler, 2009), arms races and patent races (Costanza, 1987, pp. 411-412;
Leininger, 1989, p. 233), international conflict (ONeill, 1986), and even romance
(Murnighan, 1991, pp. 67-68.)
To this list of real-world applications of the dollar auction, we would add civil
litigation. Although some commentators have remarked in passing on the possible
parallels between civil litigation and the dollar auction game (see, e.g., Bowles,
1987, p. 178; Noll, 2000), in this paper we explore this potential connection in
greater detail.
Discussion
Analytically, civil litigation is like a dollar auction game because modern litigation is
not only costly and zero sum; the outcome of any given civil case is to a great
extent contingent on the efforts of the parties. To see this, lets focus on the pre-trial
stage of modern civil litigation. (See, e.g., Melvin & Katz, 2015, pp. 98-105.) During
the pre-trial phase, the parties prepare pleadings, submit motions to the court, and
engage in discovery. Although the court (the trial judge or magistrate) does not
conduct an auction in a literal sense, the judge/magistrate gets to decide whether
the case will go trial or not, and the parties must incur escalating costs and legal
fees during the pre-trial phase as they attempt to persuade the judge/magistrate to
rule in their favor. Like a real auction, then, the plaintiff wins the pre-trial game if
the case goes to trial, while the defendant wins if the case is dismissed, in whole or
even in part.
As a result, at the pre-trial stage both parties to a civil lawsuit--the plaintiff and the
defendant--must bid indirectly or by proxy by preparing pleadings (e.g. the
complaint and the answer to the complaint), submitting motions (e.g. motion for
dismissal and summary judgment or to compel discovery), and engaging in
discovery (e.g. depositions, interrogatories, and production of documents), but the
parties spending decisions or litigation investment decisions (cf. Johnson, 1980)
are the equivalent of bids. In reality, these bids are more like bets (cf. Guerra-Pujol,
2015), since it is the judge or magistrate who decides who the winner is (i.e.
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whether the case goes to trial) and since this decision is not supposed to be a direct
function of each sides litigation investment. Nevertheless, a litigation bet can be
likened to a bid in an auction. The parties to a case are bidding in the
metaphorical sense, or to the extent they are incurring costs and legal fees during
the pre-trial stage.
Most importantly, both the plaintiff and the defendant are both required to pay their
bids, regardless of the outcome of the case. Under the so-called American rule of
civil litigation, each side to a lawsuit must pay its own attorney fees. Although some
state and federal statutes allow the winner to recover attorney fees in some cases
(see, e.g., the Magnuson-Moss Warranty Act, Public Law 93-637, codified at 15 U.S.
Code, sec. 2310(d)(2)), fee-shifting is still the exception and not the general rule. To
sum up our analysis thus far, the main similarities between the dollar auction and
civil litigation at the pre-trial stage are as follows:

The plaintiff is bidding for x or, where x is the right to go to trial;

Similarly, the defendant is bidding for ~x or not x;
The judge (at the pre-trial stage) plays the role of the auctioneer: he decides
whether the case goes to trial (x or ~x ) based on the bids (i.e. the pleadings,
motions, and discovery efforts) of the parties.

Furthermore, like Shubiks dollar auction game in which two or more bidders
compete for a fixed prize (Shubik, 1971, p. 109), civil litigation is a constant sum or
zero sum game. (See, e.g., Marshall, 1972.) Generally speaking, civil litigation does
not create new wealth; it merely transfers or rearranges wealth, since a win for the
plaintiff comes at the defendants expense, while a win for the defendant is at the
plaintiffs expense. In fact, because litigation is costly, a civil lawsuit can potentially
become a negative sum game, depending on the level of risk aversion of the
parties. (See, e.g., Viscusi, 1988, p. 105-106.)
At the same time, there are some important differences between the dollar auction
game and civil litigation. In most versions of the dollar auction, the bidders are
unable to make threats or credible commitments and are not allowed to negotiate
directly with each other or form coalitions, or in the words of Shubik (1971, p. 109):
The only communication is the bid, and the only signals are the history of bidding
in the auction. In civil litigation, by contrast, the retention of experts and the
payment of retainer fees can serve as precommitment devices, and informal
settlement negotiations are common. Nevertheless, despite these significant
differences, we often see the same pattern of reckless and costly escalation in civil
litigation that we see in the dollar auction. Why? Because modern litigation shares
the same logical structure as Shubiks dollar auction game: (i) litigation is costly,
and (ii) litigation is zero sum.
Conclusion
Before concluding, it is worth remarking on one of the most fascinating features of
the dollar auction game: it has no formal or mathematical solution. (Cf. Shubik,
1971, p. 111: The game theory analysis of the game in extensive form shows us
that the game theory model alone does not appear to be adequate.) Although
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most formal models studied by game theorists have mathematical or formal

solutions (such as the Prisoners Dilemma), the dollar auction, by contrast, appears
to depend upon virtually only the social-psychology of the players, or other unstated
factors. (Ibid.) In some situations, negative emotions can spiral out of control and
crowd out rational behavior altogether. (See, e.g., Murnighan, 2002, pp. 63-64. See
also Thaler, 2009.) In the alternative, one can argue that escalation (in the case of
the dollar auction) is a rational strategy if one wants to develop a reputation for
winning at all costs. But even if reputation effects makes escalation a rational
strategy to play in the dollar auction, this game still has no equilibrium or formal
solution.
To sum up, the dollar auction has no definite equilibrium or fixed point solution.
Instead, emotional and other psychological factors (i.e. factors external to the game
itself) can lead to costly and irrational escalation, making the outcome of the dollar
auction (when will the escalation stop?) unpredictable, unstable, and uncertain. If,
however, the bidders in the dollar auction game were allowed to negotiate with
each other, we predict that winning bids would be lower on average.

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