Bidding on eBay Shouldn’t Be So Hard

The other day I decided to venture back into the world of eBay after taking a 2-year hiatus- a result of never being able to win any items. Having forgotten about why I left the trading medium, I was soon reminded when I was attempting to bid on a used bike lock that had one day remaining, 4 bids, and a going price of $15 that I was willing to outbid. My first instinct was to bid just a little more than 15, as to not increase the final price by too much if I were to win. One hour later I received an email informing me that I was outbid, and decided to bid the maximum price I was willing to pay, and let eBay do the rest. There were 35 seconds remaining until the auction ended, and I was in the lead expecting to win. At exactly three seconds left another user abruptly outbid me and won the bike lock.

This behavior is commonly known as “sniping”, which is when users wait until the very last second and bid their maximum. But what many people don’t realize about eBay is that it is a “second price auction”. In contrast to an auction we usually see in movies where participants raise their paddles and the highest bidder pays the price that the auctioneer announced, eBay works in slightly different way. How a second price auction works is that at the closing time of any given good, the bidder who submitted the highest bid is still awarded the object but pays the price equal to the second highest amount bid.

But in a second price auction, what is the best strategy? eBay uses a proxy bidding system, one in which you may bid as high as you wish, but the current bid that is registered will only be a small increment above the next lowest bid. So if I put in my maximum bid at $40, and someone bids $30, the sale price will increase to $31 dollars, and my bid will be in the lead until someone bids over my maximum. So if a sniper was able to outbid you at the last second it may feel unfair, but they were still willing to pay more than you were willing to, assuming you put in your maximum true value for the item. So the optimal or dominant strategy for all eBay bidders, and the way eBay intended for its algorithm to work, is to simply bid your maximum amount up front and allow the proxy system to work for you. If everyone used this system the fixed timespan for the auction would be irrelevant to the final sale price, and the feeling of “unfairness” would only stem from not having enough income to win.



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