Last Minute Bidding and Second-Price Auctions on eBay
EBay uses a second price auction, in which the highest bidder wins the object, but pays a price equal to a modest increment above the second highest bid. This online auction interface allows a bidder to submit a reservation price, and to use proxy to bid for him at this price. This means a bidder could submit his proxy bid early in the auction and as subsequent reservation prices are submitted, the bid rises by the minimum increment until the a fixed end time when the highest bid -the winner- is determined.
In class we only have discussed that the dominant strategy for bidders in second price auction is bidding their true values for the item, but forgot to mention the role played by timing in the equilibrium. However, a little different from sealed bid second price auction, in the eBay online auction many bidders submit multiple bids. They can later raise the reservation price they authorized before for proxy bidding. And many cases have indicated that “sniping” is a usual phenomenon, that’s to say bidders tend to submit bids in the closing seconds of the auction, leaving no time for others to respond.
Here are two questions to ask. First, bidders who submit multiple bids obviously have not submitted their true value initially despite the dominate strategy is to bid true value. Why? The explanation could be to notice that, if an auction is common-value, bidders can get information from others’ bids that cause them to revise theirs. In general, late bidders can incorporate into their bids the information they have gathered from the earlier bids. Secondly, why so many bidders choose to be snipers? In the context of eBay auctions, the rules about ending the auction play a significant role. By bidding at last minutes, more experienced bidders could reduce fighting the increment made by inexperienced bidders who start with lower bids. More importantly, a bid made just before the auction closes could reduce the possibility that bidders who have same value for item as yours to alter their bids based on the information you provide. For instance, your true value for the item is $50 and you bid before another bidder whose true value is also $50, he will absolutely come in with a bid like $51 and he wins with stilling paying $50, the second highest bid. So maybe the optimal strategy includes not bidding early, so that other bidders tend to not realize they need to make higher bids to get the item, and you put in a higher bid -not exceed your true value- at the last minutes.
Facing multi-dimensional strategic problems presented by auctions, Roth and Ockenfels said, “We need to be alert to the fact that small design differences can elicit substantial differences in behavior,” The details in auction design may also add assumptions to the “dominant strategy” for bidders, say elements like timing in eBay’s case.
Source:
http://www.nber.org/papers/w7729.pdf
https://www.siam.org/news/news.php?id=304