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Dominant Strategy in eBay Second Price Auction

http://www.ebay.com/gds/Bidding-Strategies-Tips-for-Successfully-Winning-Items-/10000000004396516/g.html

The article suggests ways to win an auction through eBay with strategies such as proxy bidding and bid sniping. Proxy bidding refers to the automatic incremental system that eBay utilizes. The system bids on your behalf up to the highest amount that you are willing to pay for an item. Take for instance the starting price of an item is $14.99. Based on this price, the first and second bidders bid $18 and $16 respectively. The site now places the highest bidders bid (bidder 1) an increment greater ($16.05) than the second highest bid. This continues for the highest bidder every time their bid is surpassed and occurs until the bid increments to $18. Essentially, eBay bids the lowest possible while making sure it is the winning bid. As for bid sniping, the article suggests that this is the most obvious bidding strategy. It involves placing a bid as late as possible in the auction. The idea is to reduce the amount of time a bidder has to increase their bid in the case that your bid is the highest. This system may be flawed however. A winning bid may appear to be $50, but there is a possibility that the winning bidder has a bid of $100. So the selling price would just be raised to the sum of your bid ($75) plus the system increment.

There may be other flaws in strategies such as bid sniping as well proxy bidding. When a bidder has been outbid in an auction on eBay, they have a choice of increasing their bid to stay in the auction. Here we can analyze the outcomes of the possible decisions that the bidder could make based on the assumption that this bidder wants to use a dominant strategy considering second price auctions.

Essentially, when placing a bid, your bid represents the greatest amount you’re willing to pay for the auctioned item. Bidding your true value is the dominant strategy in second price auctions. Any deviation from the true value would not increase the bidder’s payoff. In the case that the second highest bidder has the choice of increasing their bid and they decide to do so, their new bid would surpass their initial bid. If they so happen to win, the bidder would end up paying more than their original value, decreasing their payoff. There also exists the decision to decrease the initial bid. This action would happen prior to the start of the auction however. Say that the instead of initializing $16 as their value for the item, the second bidder initializes a bid below $16, maybe $15.25. This would not be a dominant strategy in the case that the winner of the auction initially bids a price greater than $15.25, but less than $16. This would mean that the second bidder could have won the auction by staying true to their initial value. Ultimately, winning an auction on eBay may get you a desired item, but the question lies in if the strategy you used was the best. Reasoning through situations like the previous one can help you decide if you the strategy you choose is dominant.

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