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Proxy Bidding Leaks Information

September 12th, 2013
auctions, bidding, ebay

A friend comes to me and complains about getting sniped in an online auction. Perhaps it went something like:

timeactionmax bidcurrent winner
0auction starts$1auctioneer
200friend sets max-bid to $5$1.10friend
400stranger sets max-bid to $3.50$3.60friend
999sniper sets max-bid to $7$5.10sniper
1000auction ends$5.10sniper

They would have been willing to buy the item at $10 but lost to a sniper who only thought the item was worth $7 because the sniper put in a higher bid. If my friend had simply entered the maximum amount they were willing to pay as their maximum bid, wouldn't they have won the auction for $7.10?

timeactionmax bidcurrent winner
0auction starts$1auctioneer
10friend sets max bid to $10$1.10friend
20stranger sets max bid to $3.50$3.60friend
999sniper sets max bid to $7$7.10friend
1000auction ends$7.10friend

This is how I thought about eBay for years: just put in the maximum amount you're willing to pay and don't worry about sniping. After discussion on HN, however, I now see that while while this does guarantee that if you fail to win an item it's because someone else had a higher willingness to pay, you might be losing auctions you don't have to or paying more than you need to.

The problem is that when you place your bid, even through the auto-bidder, you're sending a signal that you're interested in the item. Other people can see the increase in price and number of bidders. For something where there's a clear consensus on value, like an ounce of gold, this information has very little effect, but things you might buy on eBay aren't mostly like that. Because no one really knows how much things are worth, your visible signal of interest tells other people they should increase their estimate of its value.

By sniping you convert an automated open auction to the equivalent of an second price sealed bid auction.

So why don't we just switch to submitting sealed bids and awarding the item, at the second-highest price bid, to the person who bids the most? There are several problems: people like feedback as they go, it's helpful to know when you've lost the bidding on something so you can go bid on a substitute, and it makes the site seem active and interesting. One way to keep all this while giving people an incentive to bid their true maximum is to randomize the end of the auction. Because no one knows when the auction is going to end sniping doesn't work anymore. (Testing this with econ undergrads (pdf) randomized auction termination did eliminate sniping.)

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