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Online Auctions

The document discusses online auction formats used by eBay and Amazon. eBay uses a proxy bidding system that functions as a dynamic second-price auction, where the displayed price is the second-highest bid plus an increment. Many bidders place bids in the final minutes or seconds of an auction to avoid bidding wars or implicitly collude. Modeling shows there is no dominant bidding strategy. Late bidding may be strategic to protect private information or collude tacitly.

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0% found this document useful (0 votes)
17 views26 pages

Online Auctions

The document discusses online auction formats used by eBay and Amazon. eBay uses a proxy bidding system that functions as a dynamic second-price auction, where the displayed price is the second-highest bid plus an increment. Many bidders place bids in the final minutes or seconds of an auction to avoid bidding wars or implicitly collude. Modeling shows there is no dominant bidding strategy. Late bidding may be strategic to protect private information or collude tacitly.

Uploaded by

dewip51243
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Online Auctions: eBay

1 Introduction
• How to run an auction on the Internet?

• Most important questions:

− What price the highest bidder pays?

− What information is posted about the current bidding?

• One obvious choice is a first-price auction.

− Pay your bid if you win (easy to explain).

− Post highest bid so far.


• But, this makes sense only if

− Bidders logged at the same time and follow in real-time the auction.

− Auction ends when no further bids.

• In practice, people are not watching 24/7 the auction.

− Bidding one’s valuation is not interesting (surplus = 0)

− Makes the game more complicate: how much underbid?

• So, let’s do a second-price auction. But what price should we display?

− Suppose we display the highest bid.

− There are two bids so far: $1 and $100.

− My value is $50: I don’t want to bid (I know I lose).

− Bidder with $100 wins, pays only $1: a disaster for the seller.
• eBay auction format: a mixture of dynamic auction and second-price auction.

− Auctions have a fixed end time (set by the seller).

− The price can last several days or weeks until the end time.

− Potential buyers can bid whenever they want.

− The displayed price is the second-highest bid (+ an increment, discussed later).

− The winner is the highest bidder and pays the price displayed when the auction
ends.
2 eBay: Proxy Bidding

• When placing a bid, eBay asks the maximum bid, and eBay will bid on the
bidder’s behalf, using increments that work like ticking prices:

Current price Bid Increment


$0.01 – $0.99 $0.05
$1.00 – $4.99 $0.25
$5.00 – $24.99 $0.50
$25.00 – $99.99 $1.00
$100.00 – $249.99 $2.50
··· ···
$50, 000.00 and up $100.00
Example 1. The current price on display is $10.00. I bid $30.00. The price goes
to $10.50.

• So, eBay works like a second-price auction:

− eBay bids (on my behalf) “just above” the highest price:

− The previous highest price ($10.00) is in fact now the 2nd highest bid

− The new price is then the 2nd highest bid (+ the $0.50 increment).

• What if there is another bidder comes later and bids $40?

− eBay will automatically compute the outcome of the “bidding war” between me
and the other bidder.

− Up to $30 I continue to bid. At that price I stop (i.e., eBay stops on my behalf).

− The last price is $31, i.e., my final bid of $30 + the increment of $1.
• Since everybody uses the proxy bidding, the auction is solved “immediately”:

− As soon as I bid $30, the price jumps to $31.

− $31 = the lowest bid that the new bidder (with the $40 bid) needs to win.

• Bidders can change their bids and they indeed do so:

− They don’t understand the bidding proxy system.

− They change their estimates of their valuations.


• Bidding several times?

Bidder 1 Bidder 2 Displayed price comment


$1.00 Starting price
$20.00 $1.25 Bidder 1 wins
$40.00 $20.50 Bidder 2 wins
$21.00 $21.50 Bidder 2 wins
$22.00 $22.50 Bidder 2 wins
$23.00 $23.50 Bidder 2 wins
$31.00 $32.00 Bidder 2 wins
$35.00 $36.00 Bidder 2 wins

− Bidder 1 may believe someone is having a bidding war with her.

− If auction deadline is close, bidders can engage in a pursuit by bidding only


small increments, and get more frantic as the deadline approaches.
3 Bid Sniping (Last Minute Bidding)

• Many bidders submit multiple bids in the course of the auction.

• A non-negligible fraction of bids are submitted in closing of the auction, called


“sniping.”

Share of all last bids Share of auctions’ last bids


Last hour 20% 68%
Last 10 minutes 14% 55%
Last 5 minutes 13% 50%
Last 1 minute 8% 37%
Last 10 seconds 2% 12%

− 13% of all bidders submit their bids in the last 5 min

− Half of all auctions have last bids in the last 5 min


3.1 Cost of sniping

• The bid may not be successfully transmitted.

− Buyers complain that their bid was not processed.

− Lower revenue for sellers.

[...] after an auction has closed we receive emails from bidders who claim
they were attempting to place a bid and were unable to get into eBay.
There is nothing we can do to help bidders who were “locked out” while
trying to place a “last minute” bid. (Axis Mundi, a seller in eBay)

• Proxy bidding aimed at protecting bidders against late bidders

− Submitting one’s true valuation is an insurance against snipers.


3.2 Benefits of sniping

• May face inexperienced bidders who bid by small increments:

− If I bid early, then the “incremental bidder” (inexperienced) will overbid and I
may end up with a high price.

− If I bid late, the bid war doesn’t last long ⇒ lower final price

− Last minute bidding: The incremental bidder doesn’t have time to respond. Can
win the auction at the incremental bidder’s low initial bid.

• A kind of implicit collusion of bidders against seller.

− Avoid “bidding war” and suppress some bids.

− Give higher profit to the successful bidders.


• With common values, late bidding has a double rationale:

− More time to gather information from the other bids.

− Avoid giving information to the other bidders.

− Particularly relevant for bidders who are identified as “experts.”


4 Modeling eBay Auctions

• Ockenfels and Roth (2006) provide a model of eBay auctions and analyze strategic
reasons for late bidding.

• There are n bidders. Minimum initial bid m and smallest increment s.

• The “current price” (or “high bid”) in an auction with at least two bidders is
equal to the minimum increment over the second highest bid.

• A player can bid at times t ∈ [0, 1) ∪ {1}.

− A bidder has time to react before the end of the auction to another bidder’s bid
at time t′ < 1.

− At t = 1, everyone knows the bid history prior to t and has time to make exactly
one more bid. The probability that a bid is successfully transmitted is p < 1.
• Private value: Each bidder i has value vi, distributed according to some distribu-
tion F .

• There is no dominant strategy!

− Let n = 2. It is sufficient to show that bidder j with value vj > m + s has no


strategy that is a best response to every strategy of the other bidder i.

− Suppose that bidder i bids m at t = 0 and then does not bid as long as he
remains the high bidder, but bids B(> vj + s) whenever he is not the high
bidder. Bidder j’s best response is not to bid at t < 1 and to bid vj at t = 1.
The payoff to j from this strategy is p(vj − m − s) > 0.

− Suppose that bidder i’s strategy is not to bid at any time. Then, the strategy
for bidder j to bid at t = 1 will give payoff p(vj − m) < vj − m, where the RHS
is the payoff from bidding vj at t = 0.
4.1 Best response to incremental bidding

• Let n = 2. Bidder j is a rational bidder with value vj > m + s, and bidder i an


incremental bidder with value vi > vj + s.

− If bidder j bids vj at t = 1, then the payoff is p(vj − (m + s)).

− If bidder j bids b ≤ vj at some time t < 1, this would be outbid by bidder i at


some t′ ∈ (t, 1) and would raise price above m + s.

− Hence, it is profitable for bidder j to bid vj at t = 1.


4.2 Tacit collusion

• Let n = 2 and both bidders have the same value v, where v > m + 2s.

− Each bidder i does not bid at any time t < 1 and bids v at t = 1.

− If bidder j deviates, i.e., places a bid at t < 1, then bidder i bids v at t′ ∈ (t, 1).

− Equilibrium payoff is p(1 − p)(v − m), while deviation payoff is zero.

− The “threat” of bidding war is credible.


4.3 Protection of information

• The object for sale can be “Fake” with probability pF or “Genuine” with proba-
bility pG = 1 − pF .

• Let n = 2. Bidder U is uninformed and has value vU (F ) = 0 < vU (G) = H.


Bidder I is informed (an expert) with value vI (F ) = 0 < vI (G) = H − c.

− If the object is fake, bidder I wouldn’t place any bid.

− If the object is genuine and bidder I places a bid at some t < 1, then bidder U
can infer that the object is genuine and outbid at some time t′ ∈ (t, 1).

− If the object is genuine and bidder I does not bid before t = 1, then bidder U
wouldn’t bid whenever pG(1 − p)(H − m) − pF m < 0, in which case bidder I
indeed places a bid at t = 1.
5 Amazon versus eBay

• From 1999 to 2006 Amazon had an auction website (like eBay).

• Auctions on Amazon worked very much like eBay:

− English ascending auction, Proxy bidding

− So theoretically it’s a 2nd price auction

• However. . .

− eBay: The auction has a hard deadline

− Amazon: If there’s a bid in the last 10 minutes, the deadline is extended for an
additional 10 minutes.

• Roth and Ockenfels (2002) and Ockenfels and Roth (2006) compare those two.
• Hypothesis about late bidding

Hypothesis Predicted observation


Strategic hypothesis
– Avoid war agains incremental bidders More late
– Implicit collusion bidding on eBay
– Protecting one’s information than Amazon

Non-strategic hypothesis
– Delaying
– Bidders unaware of proxy bidding No difference
– Valuation increases (endowment effect) between Amazon
– Bidders don’t like bids hanging & eBay
5.1 Data analysis

• 480 auctions between Oct. 1999 and Jan. 2000 analyzed.

• Auctions from eBay and Amazon.

• Items: computers & antiques

− Computer: private values, retail prices are easily available, bids convey little
information.

− Antique: interdependent values, retail prices more difficult to obtain, experts


opinion is sometimes required, bids are likely to convey information.
Cumulative distribution of auctions’ last bids
• Experienced bidders bid significantly later on eBay.

− Feedback# reflects the number of transactions a bidder participate in, and thus
the bidders’ experiences.

• For eBay: late bidding significantly more pronounced for antique.

• In a survey, bidders explicitly say that late bidding is

− To avoid bidding wars (and keep the price down).

− To avoid sharing information with other bidders.


6 Summary

• The eBay auction is, at its core, a second-price auction.

− Bidding is made via a proxy: eBay bids on behalf of the bidders.

− eBay auction is dynamic: bidders can update their bids.

− Truthful bidding is not a dominant strategy on eBay.

• Sniping is an important part of eBay auctions.

− Sniping essentially occurs because of hard deadlines.

− Sniping is less likely to occur when valuations are private (as opposed to inter-
dependent or common values).

• The use of auctions on eBay is declining, while the use of posted price increases.
References
Ockenfels, Axel and Alvin E. Roth (2006), “Last-Minute Bidding in Second Price Internet Auctions:
Theory and Evidence Concerning Different Rules for Ending an Action,” Games and Economic
Behavior, 55, 297-320.

Roth, Alvin E. and Axel Ockenfels (2002), “Last-Minute Bidding and the rule for Ending Second-
Price Auctions: Evidence from eBay and Amazon Auctions on the Internet,” American Economic
Review, 92, 1093-1103.

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