Shill-Proof Fee (SPF) Schedule: the Sunscreen against Seller Self-Collusion in Online English Auctions

Shill bidding in English auctions is the use of insincere bids on the seller’s behalf to artificially drive up the price of the listing. Shilling is illegal and has become a serious problem in online auctions because it is easy for the seller to bid under false names and hence self-collude. We show that in an independent private-value (IPV) English auction where there are heterogeneous bidders the seller can increase her expected profit by starting with a low ex ante reserve price and then optionally resetting it via shilling after observing the second highest bidder’s valuation. A shill-proof mechanism needs to ensure that the seller’s optimal strategy is to set her optimal reserve based upon her best estimation of the possible presence of a high-type bidder ex ante and not to revise the reserve via shilling. We introduce a Shill-Proof Fee (SPF) schedule for IPV English auctions where an auctioneer charges the seller a commission fee not based upon the final sale price but the difference between the final sale price and the seller’s disclosed reserve. Commission rates vary across auctions, and are mathematically determined to guarantee the non-profitability of shilling.