Winning eBay Auctions
As learned in class, second-price, sealed-big auctioning occurs where the highest bidder wins the product, but only pays the price of the second-highest bid. No matter the scenario, the dominant strategy in this auction is to bid what the item is worth to you. If you bid lower than your value, and the item is sold at a price higher than your bid value but lower than your truthful value, you could have gained a positive payoff by bidding your value. On the other hand, if you bid higher than your value and end up winning the item, you have a negative payoff because you won the item for a price that is more than you value it. When bidding and winning with your true value, you are guaranteed a positive, non-zero payoff. However, is this strategy completely dominant in all scenarios? Let’s take a look at eBay bidding, which implements a second-price auction…
The difference between eBay and conventional second-priced auctions is that the buyers do not have to gather at the same place in order to deliberate on the auction, and they may have an extended period of time (a week) to bid on the item. As a result, time becomes a very important factor in eBay bidding.
Figure 1. Cumulative distributions of bidders’ last bids over time (Ockenfels and Roth, 2001)
As shown in the Figure 1 above, most bids happen in the last 5-10 minutes of the auction. When answering the problem regarding time-related dominant strategies in eBay auctions, we must first understand the types of bidders. According to Axel Ockenfels from the University of Magdeburg and Alvin E. Roth from Harvard University, there are two types of bidders: last-minute bidders and incremental bidders. Last-minute bidders bid their true value near the end of the auction, while incremental bidders start with a bid below their maximum value, and then are prepared to raise their value in order to beat the highest bid.
Although last-minute bidding can be extremely risky “because the time it takes to place a bid may vary considerably due to, for instance, internet congestion of connection times”, last minute bidding seems to be dominant strategy for eBay second-price auctions. When bidding your value at the last moment, you may win the auction at a price that may be the incremental bidder’s initial bid, which is much lower than his or her maximum value for the item. In addition, you avoid “bid wars”, which occurs when people keep bidding on an item after they find out that they have been outbid. The end result is that “someone probably paid more than they had to for that item” (http://esnipe.com/faq.asp).
http://web.stanford.edu/~alroth/papers/eBay.ai.pdf