A "dollar auction" is a simple kind of grift that involves no deception. You auction off a dollar bill, starting bids at five cents, under slightly unusual rules: the winning bidder pays their bid and gets the dollar, but the losing bidder pays too --- they just don't get the dollar. (In some variants, it's only the runner-up who pays; in others, everyone who bid.)
So, you can imagine, initially people are eager: they can get a dollar for five cents, if nobody else bids. But once other bidders start in (after all, they can get a dollar for ten, or fifteen, or twenty-five cents) the early bidders are faced with a difficult choice: lose their five or ten cents for nothing, or increase their bids to fifteen or twenty cents, netting some eighty cents --- less than they'd hoped, but gaining eighty cents is better than losing ten.
And the other bidder has the same incentive: they can bid the price up to thirty cents (gaining seventy cents) or stand pat at fifteen (losing fifteen). And so the bids keep going up.
Typically the bids will reach two or three dollars before the bidders give up. All the bidders lose money, even the winner. The auctioneer multiplies her dollar. None of the bidders want to play again.
Now, I don't know how to analyze this game with game theory. But, in terms of human psychology, it seems straightforward: however much you're losing now, you'll lose less if you increase your bid just that little bit more and win the dollar --- and sooner or later the other bidder will give up. But at some point it becomes clear that they probably won't give up until you've raised your bid by another entire dollar.
It's a great deal for the auctioneer.
But what does that have to do with the real world? We don't see dollar-auction epidemics, do we?
To get a Ph.D. in, say, neuroscience, you have to spend some five or ten years working as a Ph.D. student, typically as a research assistant in your advisor's lab. The RA position requires great intelligence and extremely specialized skills, the skills that will eventually justify granting you a doctorate, but it's paid just above minimum wage. Also, it typically involves a great deal of painstaking and boring work. So it represents a substantial opportunity cost to the student, at the end of which time you're awarded a Ph.D. in neuroscience.
But the Ph.D. is, in itself, worthless. (They usually don't even inscribe them on real vellum anymore.) It's a sort of license to apply for a neuroscience professorship [0], or a similar position in industry. These are really great jobs: you become world-famous (within the neuroscience community --- that is to say, there are thousands of people around the world who will recognize your name and think you're cool), you get paid pretty well, the vacations are fantastic (without even taking into account travel for conferences), you have a staff of very intelligent and skilled research assistants to do the painstaking and boring part of your work for you, and in academia, the tradition of academic freedom means you can say almost whatever you want without fear of reprisal. (Unless it represents academic fraud.)
But there are many fewer such positions opening up each year than there are new Ph.D.s graduating. I don't have the numbers handy here, but it's something like one tenure-track position for every ten graduates. In order to get one of those positions, you have to appear better than somewhere around nine tenths of the other neuroscience grad students: based on the papers you published in grad school and whatever else you can persuade the school is relevant.
Which is to say, all of the Ph.D. students put in their years of hard work at low pay, but only the most productive ten percent actually win the "auction". The other nine tenths are left with an impressive degree and no job in the field.
Sounds a lot like the dollar auction, doesn't it? The only question is whether the graduate students are "bidding up" the "price" of a new tenure-track position to the point where it's "worth less" than what you "paid" for it, in terms of reduced earnings and scutwork. The psychology of the dollar auction suggests that they will, given the opportunity.
Who benefits in this case? Well, human knowledge, arguably the professors (certainly the well-established ones who had much less competition, thirty or forty years ago), and the university administrators.
[0]: I'm simplifying a bit here; the actual professorship is what you get after, typically, another ten or fifteen years of postdocs, adjunct faculty positions, and associate and assistant professorships.
You've probably heard the story of iFart, the 99-cent [1] iPhone app that plays recorded fart sounds and which sold millions of copies. Every programmer hears about it from their family, who want to know why they're not rich too. Couldn't you have written iFart?
But it turns out that nearly all the apps in the Apple iPhone App Store sell only a few hundred copies. There are hundreds of thousands XXX of iOS apps now, but only N million iPhone users (let's say 100M) who each only have around 100 apps installed. That means ten billion app installs, which means an average of 100k installs per app.
Who benefits? Apple, Google, and arguably the users of their devices
[1] I can't remember the details or look them up at the moment, so they may be wrong. It might have cost three dollars, say, or only sold hundreds of thousands of copies.
Most bands, famously, never earn any royalties; the record label pays them an advance against the royalties, but they never make enough royalties to pay back the advance. The advance itself is paltry money. XXX
So the dollar-auction dynamic XXX
How about making the reward levels fixed-count instead of fixed-dollar? Say, the top ten donors each get a gold-plated widget, the next twenty each get a nickel-plated one, and the next forty each get a widget. Could this inspire the donors to donate more than they do today?