A look into auctioning on eBay
Just today, I decided to put my iPod touch on eBay for sale. I have sold a few things on eBay previously but never using an auction. Since we’ve just recently had the lecture on auctions, I thought it would be relevant to put my iPod touch on auction instead of their fixed price deal.
The eBay auction systems works similar but not exactly like a second-price auction system. The following scenario explains the basic concepts involved in eBay auctioning. Player 1 bids on an item for $10. Player 2 then bids on the item for $20. Instead of the price of the bid going to $20, it actually is placed at $11, just above $10. Now if player 3 bids for $15, the price of the bid will jump to $16 but still belongs to Player 2. This system is a combination of ascending-bid and second-price auction because a player can bid more than once, unlike the second-price auction, but the price of the item is only $1 more than the second highest bid.
In studying this particular system, it is useful to think how it resembles an ascending-bid and a second-price auction. If you have an item whose true value to a buyer is v, a first impression would be that users would simply enter their own v as is the dominant strategy for second-price auction. However, if you study the common behavior of eBay bids, prices on an item do not jump to v right away. In reality, this system behaves more like an ascending-bid as most people prefer to slowly raise their prices in hopes of getting a better deal.
Another point to be made is how this eBay system deviates from a true ascending-bid system. One common theme is how people often wait until the last few hours before placing bids. Because of the time constraints, this strategy will often lead to lower prices because the true value of the item is never reached before the item closes. However, a contradicting argument can be made in that bidders may overpay their price v in the excitement of last second bidding.
There is one last feature on eBay that is interesting to think about. You can choose an auction but with a “Buy it now” feature added so that if someone wants to purchase the item right away, they can pay the fixed price and overwrite the auction. However, when thinking about this feature, it occurred to me that this feature was not helpful to sellers. From a buyer stand-point, you would not pay the “Buy it now” price unless the price of the auction is about to exceed this price. It basically put a ceiling on the price that item can go to. From a seller’s point of view, I can only think of one scenario where it could raise the price. If the buyers use this value as a estimation of the buyer’s value of the item, the seller could potentially trick the buyer into thinking the item is worth more than it is by placing a high “Buy it now” price. However, I am not completely convinced this tactic would work.