Sniping and Squatting in Auction Markets∗

We conducted a field experiment to test the benefit from late bidding (sniping) in online auction markets. We compared sniping to early bidding (squatting) in auctions for newly-released DVDs on eBay. Sniping led to a statistically significant increase in our average surplus; however, this improvement was quite small. Nevertheless, the two bidding strategies resulted in a variety of other qualitative differences in the outcomes of auctions. We show that the small gain to sniping together with these other patterns in outcomes cannot be explained by a standard auction model with a single auction and payoff-maximizing opponents. Instead, all of the experimental results can be explained by a model in which multiple auctions are run concurrently and a fraction of our opponents are näıve in that they act as if eBay auctions are literally English auctions rather than dynamic second-price auctions. Our findings illustrate how the effects of behavioral biases identified in the lab may be substantially attenuated in real world market settings. ∗We thank Marcin Peski for a suggestion leading to Proposition 1 and David I. Levine, John Wooders and seminar participants at ESA Asia-Pacific Regional Meetings, Econometric Society Summer Meetings, City University of Hong Kong and University of Oska-ISER for comments and suggestions. We also thank Kam Wing Siu and Alvin Ho for excellent research assistance. †Department of Economics, Northwestern University. Support from the Alfred P. Sloan foundation is gratefully acknowledged. [email protected]. ‡Department of Economics, Hong Kong University of Science and Technology. [email protected].