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Ebay, Second Price Auctions, and Last Minute Strategies

Brian Chen

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Ebay’s live online auction events follow the guidelines of a second price auction. In a second price auction, the winning bid does not pay his or her bid but the second highest bid in the auction. This is different from a first price auction where the winning bid pays the bid that he/she submitted. According to David Friedman, an academic economist and law school professor, Ebay’s utilization fails to work in practice to the theory. However, there are problems that occur when trying to enforce the guidelines of a second price auction through an online live auction event such as Ebay’s auction.

One problem with trying to enforce the guidelines of a second price auction so that the auction is fair to everyone is that online auctions are set on a timer, and once the timer runs out, there is no possibility for any of the bidders to alter their bid. This is unlike the live auctions in person where an auctioneer would ask “Going once, going twice…… SOLD!”, giving all bidders in the audience a chance to top the current highest bid in the auction. However, in the case of online bids that run on a timer, it brings up the problem of last minute bidding. Last minute bidding occurs when someone bids a price above the current highest bid in the auction close to when the auction ends so that the other bidders don’t have enough time or information to alter their current bid and the last minute bidder ends up “stealing” the auction win.

David Friedman assumes that the last minute bid is the true value of the winning bidder. A bidder’s true value of the good indicates how much he or she thinks the good is worth. However, this is such a common occurrence that now some bidders just assume that this is the expected behavior of every other bidder. It can be assumed that if you place a reasonable bid at night, by the time you wake up in the morning, you can bet your bid has been topped by another bid. This leads to the introduction of another strategy, the last minute strategy. If you know and expect that all bidders will just act in the last minute, you might as well just place your high bid in the beginning of the auction and force other bidders to reevaluate their strategies. As a result, all bidders will have to reevaluate their true value for the item and you would be able to place your bid in at the last minute.

 

http://daviddfriedman.blogspot.com/2010/07/ebay-and-second-price-auctions.html

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