An Investigation of Premium Bidding in Online Auctions

Although the Internet is useful for transferring information, transactions in Internet auctions can have a greater information asymmetry than corresponding transactions in traditional environments because current auction market mechanisms allow the seller to remain anonymous and to easily change identities. Buyers must rely on the seller's description of a product and ability to deliver the product as promised. Internet auction environments make opportunistic behavior more attractive to sellers because the chance of detection and punishment is decreased. In this research, we show how fee structures at eBay, the largest online auction house, motivate shilling behavior. We distinguish between two different types of shilling that exhibit different motivation and behavior: shilling can be used to make the bidders pay more for an item, competitive shilling, and shilling that can be used to avoid paying auction house fees, reserve price shilling. We then use data on 10,260 eBay auctions during April 2001, with 30,496 bids on 7,071 auctions from 5,304 distinct bidders and 1,385 distinct sellers, to examine reserve price shilling using a probit model. Our results show that with reserve price shilling, bidders tend to repeat their behavior, book value and starting bids are indicative of reserve price shilling. _____________________________________________________________________________