Sniping Bargains: Late Bidding on Pairs of eBay Auctions

Internet auctions have resulted in much data that may shed light on buying and selling behavior. Furthermore, they have allowed for field experiments to explore these phenomena with more control and with greater depth. Finally, they have revealed new behavioral patterns worthy of exploration. One of these behaviors is late bidding, or sniping, which occurs when people place bids close to the auction’s close to supposedly have a greater chance of winning at a lower price. This study investigated the monetary benefit a user may gain by delaying the decision of which auction to bid on until the last two minutes. It reviewed past data on DVD auctions to examine this effect. This journal article is available at ScholarlyCommons: http://repository.upenn.edu/wharton_research_scholars/38 Dan Berstein Faculty Mentor: Uri Simonsohn Special Thanks to Vijay Nagappan Wharton Research Scholars Spring 2007 Sniping Bargains: Late Bidding on Pairs of eBay Auctions I. Background Information Internet auctions have resulted in much data that may shed light on buying and selling behavior. Furthermore, they have allowed for field experiments to explore these phenomena with more control and with greater depth. Finally, they have revealed new behavioral patterns worthy of exploration. One of these behaviors is late bidding, or sniping, which occurs when people place bids close to the auction’s close to supposedly have a greater chance of winning at a lower price. This study investigated the monetary benefit a user may gain by delaying the decision of which auction to bid on until the last two minutes. It reviewed past data on DVD auctions to examine this effect. There has been much work done on eBay auctions in the past. eBay auctions use a proxy bidding system. Each bidder submits the maximum amount they are willing to pay for an item and the system automatically adjusts the appropriate increments whenever new bidders challenge the current price. Before proceeding, it will be useful to review some of the relevant literature describing buyer behavior on eBay. Multiple Bidding (Ockenfels and Roth 2006) Ockenfels and Roth, along with other researchers, have explored the phenomenon of multiple bidding. Instead of bidding once, many eBayers bid incrementally, placing multiple bids on the same auction. This is worthy to note, although this study is concerned with late bidding. Late Bidding (Adapted Mostly from Bajari and Hortaçsu 2004) Research has proven that late bidding is a common behavior (Bajari 462). Theoretically, late bidding should not be optimal because of eBay’s proxy bidding system, which allows bidders to submit a private maximum reservation price for the item and subsequently places bids against competitors as they arrive. In 1961, William Vickrey observed that, in a second-price sealed-bid auction, bidding ones actual reservation price is a weakly dominant strategy because it has a larger chance of winning and the payoff is based on the second-highest bid, so there is no risk of being forced into a higher price (462). However, eBay data reveals late bidding behavior is still occurring. The question is why. Ely and Hossain demonstrated that sniping produces a benefit, albeit a small one, by bidding on auctions for 20 different newly-released DVDs using 4 different valuation levels. (Ely and Hossain 2006)