COS 444 Internet Auctions: Theory and Practice

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COS 444 Internet AuctionsTheory and Practice
Spring 2008 Ken Steiglitz
ken_at_cs.princeton.edu
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Some details of eBays Algorithm

• Normal case (assume tick 1)
• 20 ......... high bid
• 12 minimum allowable bid
• 11 posted (will be paid)
• 10 second-highest bid

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Some details of eBays Algorithm

• Suppose next bid is 19.90
• 21 ......... minimum allowable bid
• 20 high bid (posted, paid)
• 19.90 .... second-highest bid

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Some details of eBays Algorithm

• Suppose next bid is, instead, 20.10
• 21.10 . minimum allowable bid
• 20.10 . high bid (posted, paid)
• 20 second-highest bid
• If now high bidder raises her bid to 21.10 or
  higher, her posted price ---
• which she would pay, goes up! This is
  basis of a law suit

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Theory

• A slick way to derive equilibrium use value
  space
• We assume a 1-1 bidding function b(v) .
• Then if bidder 1 bids b(z), the equilibrium
  condition is that surplus be maximized when z
  v1 .
• This corresponds to bidding b(v1 ) .

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Field Experiment

• Public Versus Secret Reserve Prices in eBay
  Auctions Results from a Pokémon Field
  Experiment, R. Katkar D. Lucking-Reiley, 1
  December 5, 2000.
• We find that secret reserve prices make us
  worse off as sellers, by reducing the probability
  of the auction resulting in a sale, deterring
  serious bidders from entering the auction, and
  lowering the expected transaction price of the
  auction. We also present evidence that some
  sellers choose to use secret reserve prices for
  reasons other than increasing their expected
  auction prices.

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Field Experiment Katkar L-R 00

• 50 matched pairs of Pokémon cards
• 30 book value, open secret reserve
• Open reserve increased prob. sale 72 vs. 52
• Open reserve yielded 8.5 more revenue
• Caution these are low-priced items!
• What are possible pros of secret reserve?
• Evidence of illicit transactions around eBay

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Theory

• Heres a different kind of auction
• High bidder wins the item
• All bidders pay their bids!
• the All-Pay Auction
• Models political campaigning, lobbying, bribery,
  evolution of offensive weapons like antlers,
  etc.
• Whats your intuiton? How do you bid? Is this
  better or worse for the seller than first-price?
  Second-price?

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Theory all-pay auction

• Start with
• Esurplus pr1 wins v1 b ( v1 )
• equilibrium

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Praxis Reasons to snipe

• Avoids bidding wars
• Avoids revealing expert information
• (if you are an expert)
• Avoids being shadowed
• Possibly conceals your interest entirely
• Ockenfels Roth (2006) suggest implicit
  collusion (prisoners dilemma)
• Nonstrategic
• Avoids early commitment

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Praxis Reasons to bid early

• Scaring away competition
• Raising ones own bid even scarier
• Impatience, anxiety, pride
• Rasmusen (2006) suggest cost of discovery leads
  to a collusive equilibrium
• Allows you to sleep, eat, etc. (But sniping
  services and software solve this problem.)

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Praxis Field studies of early and late bidding

• Roth Ockenfels papers
• eBay, Amazon, and Yahoo rules
• (Yahoo now out of the auction business)
• Open Problem How can a seller encourage early
  bidding?