Skip to main content



Auction Sniping

Article: http://kuznets.fas.harvard.edu/~aroth/papers/equilibrium.geb.pdf

In class, we learned that the dominant strategy for bidders in a second price sealed-bid private value auction is to bid their value. However, this may not always be the dominant strategy in auctions with a fixed end time (hard close auctions). This paper showed that perhaps “sniping” an auction, or placing a bid in the last possible moment, may actually be a better strategy on hard close auctions, like the auctions that can be found on eBay. However, whether or not sniping is a dominant strategy depends a lot on the rules of how an auction ends. On Amazon, for example, the remaining time is extended to ten minutes if it was at less than ten minutes when the last bid was placed.

An interesting phenomenon that the researchers observed was that many bidders would submit multiple bids in the course of the auction. In a second price sealed-bid private value auction, there should be no incentive to not bid one’s value for the item. But, as it turns out, the more naive bidders tend to bid incrementally. And, incremental bidding may induce bidding wars between other incremental bidders, which would drive the price up. It turns out that sniping auctions is the best response to naive, incremental bidders. The researchers found that a majority of the sniped auction winners were also experienced bidders (based on their eBay feedback score).

Sniping auctions, however, has risks associated with it. In order to successfully snipe an auction, one would have to submit their bid at the last possible second. However, because of connection delays, this bid may not reach the auctioneer in time before the auction has closed. This means that there is a non-zero probability that the bid will be lost. The researchers have shown that even given these risks, sniping the auction is consistent as an equilibrium, even if that was the first bid on the item. They conclude that “there can exist perfect Bayesian equilibria in which bidders do not bid early… but only bid at the last moment.”

For soft close auctions, the researchers have concluded that there is no benefit to sniping the auction. In a quite obvious manner, there is no gain in sniping the auction because the time remaining will be extended while the risks in sniping is still present. In the equilibrium situation, all bidders should bid their true value in soft close auctions.

The researchers also looked at the situation where the value of the item may be uncertain using the data of antique auctions as their sample. They conclude that in the case of a hard close auction, the informed bidder will gain most value by sniping the auction, while in the case of a soft close auction, the informed bidder will never gain value due to the automatic extension rule.

In conclusion, auction sniping may be the best response to incremental bidding strategies for hard close auctions. There is also no reason to not auction snipe for other hard close auctions even though this behavior occurs due to an out-of-equilibrium incremental bidding behavior.

Comments

Leave a Reply

Blogging Calendar

November 2011
M T W T F S S
 123456
78910111213
14151617181920
21222324252627
282930  

Archives