Ebay in real life

In class we have been discussing auctions specifically the second price auctions of ebay. In the cases we look at in class it is always an idealized situation where the bidders bid their maximum bid into the proxy system and thus the highest bidder wins paying the second highest price. This article discusses the difficulties of actually applying this rational styled thinking to Ebay with real users due to irrationality of people. chains of though like he knows that i might know that he knows and so on can cause people to act irrationally thus changing the actual outcomes of the auction from its ideal outcome to a more unpredictable one.

http://www.slate.com/id/2166662/

I agree wholeheartedly that theory doesn't work with eBay. There is also the fact that the second price auction model is what it is, a model, and it doesn't completely capture what eBay is. It doesn't account for the irrationality of bidders not bidding their maximum value initially. This is actually why bid sniping (see http://www.wired.com/techbiz/media/news/2002/09/55204) is so effective. A more accurate model of eBay would take these irrationalities and the effect of time into account, which is not easy for any economist to do.

This website talks about the research of the revenue generated in a first price and second price auction.
http://expertvoices.nsdl.org/cornell-info204/2008/03/30/a-nod-to-william-vickery-and-second-price-auctions/

As discussed in class, it was concluded that the a first price auction and a second price auction produced the same amount of revenue. As proclaimed in this site, this resembles the natures of the two auctions. It turns out that the revenue of the second highest bidder and a "discounted" highest value generate the same revenue. This is the basis for bidding on websites such as eBay, and its foundation was developed by a man named William Vickrey. Vickrey was a nobel prize winner, well known for his revenue equality theorem for auctions. As long as Vickrey's advice is followed, the auction system will be stable and justifiable: "Always bid your true value".

I totally agree with OP.

On another similar note, although it is against the rules, there are also fake accounts that sellers make to inflate prices. Personally, when I bid on Ebay, I never bid my highest bid because there's a chance that a fake account and come and inflate the price. So I tend to just wait and snipe for the product in the end.