Snipe Hunt!
http://daviddfriedman.blogspot.com/2010/07/ebay-and-second-price-auctions.html
We’ve all been there before. Watching an Ebay auction. The price was so low. $7 for a limited-release CD You put in a bid for $7.50. The time ticks down, 5, 4, 3, 2, … And suddenly, at the last second, a new bid pops in. You are no longer the highest bidder… and now you lose Somebody put in a bid at $7.51, and the super-duper rare, super-duper limited edition of Girls Dead Monster’s Rare and Unreleased Tracks that you spent the last three days dreaming about isn’t yours anymore. What just happened?
The flurry of last-second bids illustrates a phenomenon that occurs in some time-limited online auctions known as bid sniping. In bid sniping, parties wait until the last second possible to submit their bids. The idea behind bid sniping is that since prices for an item with few bids on it tend to have low prices, the bid sniper can wait until the last second until they put in a new bid only slightly higher than the current prevailing bid- buying the item for hopefully below their true value without allowing time for other bidders to respond to this new information. David Friedman presents a possible reason for why people attempt to bid snipe. In a traditional ascending price auction, people have free access to the information about the current bid and have time to reflect on this information and respond to these moves. A person viewing an item and watching the price climb might suspect that it is worth more than his original true value and adjust his true value accordingly. In this case, bid sniping is an act to restrict opponents from freely accessing information in this game.
Consider the structure of a traditional ascending price auction- The auctioneer names a price and people start bidding up on the ladder until eventually only one bidder is left standing. The highest price named is the price paid by the bidder. This is theoretically how an Ebay auction should work. People have the opportunity to bid until their true value without a hard time constraint and before each price elevation bidders have a few moments to think. However, in the case of an auction-sniping war, people do not increment the price until the last few seconds of an auction. This changes a few characteristics of an ascending-price auction. Firstly, it means that the price is not allowed to ascend freely. In an ascending-price auction the auctioneer names a price open to all bidders without a regard for time. Each bid is given a window to be responded to and the price will rise as long as there is a bidder willing to meet it. However, in the case of a bidding war, there is a hard cap of sorts to the going price- it can only rise so much until time expires and the current prevailing bid is accepted. As such, it is possible for the item to be sold at a value beneath the true value of the true highest possible bidder, because another bidder managed to submit the highest bid a few seconds before closing – preventing the other bidder from responding in time. This creates a sort of failure to fully emulate an ascending-price auction, because the true highest bid is never accepted due to an artificial constraint.
However, there are ways to respond to the actions of the bid sniper. We consider that the bid sniper’s objective is to buy the item for a value that is meant to be lower than their true value (and most likely the true true value). To combat bid sniping, one might decide to use a bid sniping service themselves. The way a bid-sniping service works is that you put in the maximum value that you are willing to pay (in class we proved that this would be your “true value”). The bid sniping service then pings the auction in question and sends in automated bids until the last seconds of the auction. Alternatively, because in a service such as Ebay, you might decide to bid your true value. Ebay would then generate artificial bids up until the bidding exceeds your input value. Bid sniping has a tendency to change the dynamics of an ascending price auction into a second price auction. Instead of allowing each actor time between increments to raise the price of an auction, players must reveal their true values at the same time with the prevailing bid to be only slightly higher than the next highest bid. Thus the eventual winner does not pay their true value necessarily, just a price slightly above the next highest bid.
However, these last-second bidding wars tend to have an effect on the players that may cause them to act as irrational actors. We assume in our discussions that all players in an auction game are rational, and know their own true values. In the case of a last second bidding war, the game takes upon a psychological dimension in which some people might start to view it as a competition, “I win and you must lose”. Furthermore, some bidders might not have a completely clear grasp of what their true value is. These players complicate the auction process by behaving like irrational actors, in which they might be so blinded by animal spirits that they ignore rational arguments when placing bids. As such, sometimes these people may purchase these items for more than their true value because they were so invested in “winning” the auction rather than winning in value.
Auction sniping has a tendency to cause large amounts of “saltiness” among people who lose out on the auction “competition”. However, I hope that by reading this article, you might be better able to understand the theoretical ideas behind that Ebay auction and understand your options when it comes to the next auction. Now if you don’t mind, I need to snipe this super-limited edition of Girls Dead Monster’s Rare and Unreleased…