Ebay Auctions: Bidder and Seller Strategies
The auctions on Ebay are English auctions in which bidders can submit bids until a certain deadline and the bidder with the highest bid wins and pays that bid. At any given time, the highest bid is known. This is different from the sealed auctions that we studied in detail, where bidders do not have information about the valuations of the other bidders. According to a research done by professors from the College of Information Systems at Colorado State University, the dominant bidder strategies for Ebay auctions seem to be what sniping and probing. Sniping is a strategy in which bidders submit their bid right before the auction ends so that other bidders would not have time to respond to the new bid. This tends to maximize payoff because it reduces the number of total bids submitted and thus minimize the price that the bidder pays for the item (with the assumption that the bidder is rational so the bids that he submit is always less than or equal to his true value). The research also found probing to be an effective strategy for winning a bid. A probing bidder always submit the minimum bid required to outbid the highest bid until the auction ends or until the bid has reached his value of the item. Like the sniping strategy, this strategy maximizes payoff by minimizing the price that the bidder needs to pay in order to win the bid.
Given these bidder behaviors, a seller would have to think strategically about what to pick as a starting price to maximize his profit. At first, it would seem that setting the starting price to a number that is less than the seller’s valuation of the item would not be an effective strategy as this can result in a negative payoff to the seller. However, a study has found that setting a lower starting price for an auction leads to more bidder traffic in the end and thus result in higher bids. This is the outcome caused by information cascades, a phenomenon in which people try to copy the behaviors of others. A lower starting price draws more bidders and as this traffic increase, information cascades come in and more bidders want the item because everyone else seem to think it is good. This means that they will be more likely to submit a bid that is higher than what their initial valuation of the item was. The seller then benefits more from setting a lower starting price than a higher one.
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