William Poundstone, in his book, Prisoner's Dilemma, attributes the dollar auction to Martin Shubik and his colleagues, John Nash, Lloyd Shapley, and Melvin Hausner at the RAND corporation. (Shubik published the game in a paper in Journal of Conflict Resolution in 1971). As game theorists, they were looking for ways to incorporate pathological behavior into a game, in this case, addiction, and they wanted to make it easy enough to do as a parlor game.

Though it may be irrational to pay more than one dollar for a dollar, at any stage of the bidding, the second highest bidder can rationally improve his or her position by incrementally outbidding the first highest bidder.

The escalating commitment involved has been used to analyze labor negotiations, business investment, military strategy, why people stand in line for an hour for a two minute roller coaster ride, and even romantic relationships. Stewart Brand used to play this game to illustrate the psychological underpinnings of a nuclear arms race.

Source: William Poundstone, Prisoner's Dilemma, Doubleday, NY 1992