So we know exactly how much to bid, but do we know when to bid?
Li Du and Qiying Hu analyze eBay bidding patterns in their paper, “Analysis of Bidding Behavior on eBay Auctions”. They examine the optimal bidding strategy (how much to bid) as well as the optimal bidding time (bid near the beginning or end of an auction?). Traditionally, there have been two types of bidders: AV bidders who are greatly influenced by the bidding history of an item and bid throughout the auction and IPV bidders, who don’t take the bidding history into consideration and typically bid early and close to their value. According to Du and Hu, bidders are not quite so binary; there are hybrid AV and IPV strategists. They are described as below:
- Traditional IPV (independent private values) bidders: their valuations on items are independent and private, unaffected by other people’s bids
- IPV thinker: unaffected by other people’s bids, but take into consideration the impact their bids will have on other bidders
- AV (affiliated valuations) tracker: affected by other people’s bids, but do not take into consideration the impact their bids will have on other bidders
- Traditional AV bidders: affected by other people’s bids and also take into consideration the impact of their bids
The four different types of bidders can be summarized succinctly as evaluators, opportunists and participators. Traditional IPV bidders can be classified as evaluators: they bid early knowing the true value of an item. Traditional AV bidders can be classified as participators: they bid incrementally, always bidding the minimum required bid. IPV thinkers and AV trackers are both classified as opportunists, where IPV thinkers consider the effect of their bid and tend to bid near the end, while AV trackers are influenced by other bidder’s bids but don’t take into consideration the influence their own bids may have, leading to irrational, sometime impulsive bidding.
This paper discusses two important aspects of bidding. In Section 3, they cover the optimal bidding strategy. Du and Hu come to the same conclusion as covered in class: for eBay auctions, which are sealed-bid second-price auctions, the optimal bidding strategy is to bid your true value or slightly below that. This raises the question however, of when should a buyer place her bid? In an ideal situation, bidders would not be influenced by other bids- in the real world, this is not the case. Oftentimes, buyers who do not know the actual value of an item may bid incrementally throughout the auction.
If a buyer places her bid too early, other users may bid slightly higher, which ends the auction prematurely if she bid exactly her value. However, she also prevents opportunistic buyers from sniping a good deal. If she bids later, she faces a variety of possible problems including server lag, computer problems, or other inconveniences. However, in an ideal situation, late bidding is still preferred due to the small minimum increment between bids. However, this is not the case in auctions that prevent bidding at the last minute. Certain auctions said to be under “3G stopping rules”- any last minute bidders will extend the auction for a brief amount of time, allowing others to bid again, further raising the price while extending the auction. Under these conditions, it is not necessarily optimal to bid near the end- in fact it is rather difficult to determine when to do so. In short, one should always bid their true value as close to the end of the auction as possible to maximize payoff.