Game Theory And EBay Auctions

EBay auctions are designed as second price auctions. However many users do not understand it and participate as if they are in a Traditional English Auction. There is a way to exploit this fact! As explained in this article, the mathematically optimal strategy under the situation is sniping: “don't show any interest in the auction at all until the very last 15 seconds. Then enter your real Max Bid.” Give it a try next time.

Although it is true you could place your max bid with 15 seconds to go, you could also take advantage of the buyer's inherent fear of losing money. If you wait a day or two into the auction, and at this point no one will be really bidding because it is way too early if it is a week long auction, then you could submit proposals via messaging. You could message the buyer and tell him you will take the item off his hands for say, half your value of the item, if he ends the auction right there. At this point the seller sees that he hasn't received many bids, and may be fearful of losing money on the item, or if he didn't pay much for the item, receiving a proposal for a straight-up purchase may seem very appealing if he doesn't have to wait to see if he makes/loses money. So it's possible to get a better deal than waiting until the end to bid, by getting maximum value by proposing a straight-up purchase at the beginning of the auction. And hey if that doesn't work, you can still wait to bid your max value during the last 15 seconds. But who knows, you may have saved half your value by trying a proposal at the beginning.

The strategies that we learn in class, for example in an all pay auction with two people bid your value squared divided by two, obviously only works in theoretical cases. Or as the post above mentions, one of the best strategies for second-price auctions such as ebay is to bid 15 seconds before the end of the auction (which is what I usually do). But what really happens with ebay auctions? Does it follow theories of second price auctions or even common sense?

The answer, according to this article (reporting on several different research) says no. Quoting a Stanford research team, ""We found that in 43 percent of the auctions the bidders ended up paying more than the 'buy it now' price,". People apparently are not playing the correct strategies in the second price auction possibly because the thrill of an auction causes them to do fairly stupid things. In one case, bidding went past the 'buy it now' price of $125 to $185. This article, found here , goes into more detail in "Why we do what we do on Ebay" and gives advice on what sellers and buyers should do on ebay.

What this all leads to is if ebay really be a place to learn about second price auctions? Many researchers have been flocking to ebay because it is one of the only medium where mass auctions can really be studied. But how much can be learned from Ebay, in terms of auctions only, if almost half the people that participate in auctions do it sub-optimally, may not because they cannot comprehend how auctions are pose to work, but maybe because they get too caught up in the suspense leading to the final seconds of the auction.