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Snipers, Shills, and Sharks – eBay and Human Behavior


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Wow--a rare treat, enjoyable to read and useful for anyone who ever wondered what to do when they crack open the eBay home page! -- Orley Ashenfelter, Princeton University There is a wealth of interesting detail about how eBay actually works in practice, along with lessons to be drawn from the theory. Graduate students in economics and allied fields will see this book as a very nice reader were they thinking of doing research in the area of auctions in general and eBay in particular. Steiglitz offers a useful gateway for those interested in delving deeper into this topic area. The book is invaluable for instructors looking to offer a course on electronic auctions. -- John Morgan, University of California, Berkeley Steiglitz is uniquely positioned to discuss eBay--as a computer scientist, an aficionado of eBay and auctions for rare coins, and someone well versed in auction theory. The book is peppered with vivid examples and first-person tales. The main theme throughout is that real-world bidding behavior and prescriptions for auction design differ sometimes quite markedly from that predicted by classic auction theory. Steiglitz's approach is pragmatic: what does the empirical evidence reveal about how people bid on eBay, and which kinds of auctions are best for sellers? Most notably, the author provides behavioral explanations for commonly observed behavior on eBay, such as sniping, as well as anecdotal evidence about bidding rings and other seller manipulations. -- David C. Parkes, Harvard University

Table of Contents

Preface xiii To the general reader xiii To students and course instructors xiv Synopsis xv Acknowledgments xix Chapter One: English and Vickrey Auctions 1 1.1 Auctions 1 1.2 A Brief History 5 1.3 English Auctions 8 1.4 Variations on the English Theme 10 1.5 Truthful Bidding is Dominant in (Japanese Button) English Auctions 12 1.6 Sealed-bid Second-Price (Vickrey) Auctions 14 1.7 Mail-bid Auctions 16 1.8 Weak Strategic Equivalence of (Japanese button) English and Vickrey Auctions 17 1.9 The Four Standard Auctions and Why They Are Two Pairs 18 1.10 Disincentives to truthful bidding 21 1.11 Questions 22 Chapter Two: From Vickrey to eBay 25 2.1 eBay as an Evolutionary Product of Vickrey: The California Auction 25 2.2 Other Online Auction Rules 28 2.3 eBay <> Vickrey 30 2.4 Summary 32 2.5 Questions 32 Chapter Three: eBay Strategies Observed 34 3.1 Some Bidding Histories 34 3.1.1 Start and End Clustering, Snipers 34 3.1.2 A Bidding War 36 3.1.3 An Early Bidder and Her Fate 38 3.2 "Enter Your Maximum, Then Sit Back and Watch!" 39 3.3 Good Reasons to Snipe 40 3.4 Other (Generally Good) Reasons to Snipe 43 3.4.1 Bidding Wars, Response to Incremental Bidding 43 3.4.2 Implicit Collusion 44 3.4.3 Nonstrategic Reasons to Bid Late 45 3.5 Some (Questionable) Reasons to Bid Early 46 3.5.1 Uncertain Values and the Cost of Discovery 46 3.5.2 Scaring Away Competition 47 3.5.3 Nonstrategic Reasons to Bid Early 50 3.6 On Balance, Snipe 51 3.7 Seller Choices 51 3.7.1 Opening Bid 52 3.7.2 Use of a Secret Reserve 54 3.7.3 Use of the Buy-It-Now Option 56 3.7.4 Other Seller Choices 57 3.8 The Next Three Chapters 60 3.9 Questions 61 Chapter Four: What If eBay Were First-Price? 65 4.1 First-Price Is the More Natural Assumption 65 4.2 The Sealed-Bid First-Price Auction 66 4.3 The Simplest of All Worlds 67 4.3.1 The Independent Private Values (IPV) model 67 4.4 How to Shade 71 4.5 Revenue: The Bottom Line 73 4.6 A First-Price eBay Would Discourage Early Bidding 74 4.7 First-Price Is More Work for the Bidder 75 4.8 Further Theory Disappoints 76 4.9 Conclusion 77 4.10 Questions 78 Chapter Five: The Signals that Sellers Send 79 5.1 Reserves 79 5.2 Price Estimates and Related Revelations 81 5.3 Virtue Rewarded, in Theory 83 5.4 Art, Silver, and Jewelry Auctions: Empirical Observations of Seller Price Estimates 86 5.5 The Complexity of the Seller's Signaling 88 5.6 What Theory Has To Say About Reserves 90 5.6.1 The Tradeoff in Second-Price Auctions 91 5.6.2 The Tradeoff in First-Price Auctions 91 5.6.3 The Optimal Reserve 92 5.6.4 The New Equilibrium 92 5.6.5 Practical Implications 94 5.7 Field Experiments 95 5.8 A Field Comparison of Public vs. Secret Reserves on eBay 99 5.9 Lucking-Reiley's Magic Window in Time 100 5.9.1 Field Confirmation of Some First-Price Theory 101 5.10 Flatness of Revenue vs. Reserve Curves 102 5.11 The Importance of the Extra Bidder 104 5.12 Extracting Some Advice for the eBay Seller 105 5.13 Questions 107 Chapter Six: Prices! 108 6.1 Appraising the Scaffolding 108 6.1.1 Valuations 109 6.1.2 Equilibrium 111 6.1.3 Homo economicus 111 6.2 Overbidding: Some Classroom Experiments 112 6.2.1 Experiment 1: First-price with Uniformly Distributed Valuations 113 6.2.2 Experiment 2: First-Price with Less Competition 114 6.3 Feedback and Learning 116 6.3.1 Feedback in First-Price Auctions 117 6.3.2 Feedback in Second-Price and English Auctions 117 6.4 Overbidding: Jars of Nickels 118 6.5 Results from the Field: Tests of Revenue Equivalence 120 6.5.1 Magic on the Internet: A Surprise 121 6.5.2 Music CDs and Xboxes on eBay 123 6.6 Reconciliations 125 6.7 Equilibrium Regained 125 6.7.1 Risk Aversion 126 6.7.2 Spite: An Alternative Theory 130 6.8 The Theoretically Informed (and Human) eBay Bidder 134 6.8.1 Simply a Mistake: Bidding Untruthfully in Vickrey's Setting 135 6.8.2 The Winner's Curse 135 6.8.3 Lessons from the Failures of Revenue Equivalence 137 6.8.4 Spiteful Behavior 138 6.8.5 Wars, Frenzies, and Bubbles 140 6.9 Questions 147 Chapter Seven: Transgressions 150 7.1 Shills 150 7.1.1 Shill Bidding and Theory 155 7.1.2 Mock Auctions: The More Important Diamond 157 7.2 Bidder Rings: 84 Charing Cross Road 158 7.3 Ethics 162 7.3.1 The Twinge of Guilt: The Buyer Withholds Information 162 7.3.2 Conversely: The Seller Withholds Information 163 7.3.3 Sniping 164 7.3.4 Shadowing Bidders 164 7.3.5 The Ethics of Feedback 165 7.3.6 Exporting and Importing Ancient Artifacts 166 7.4 A Note on Downright Fraud 168 7.5 Fakes 169 7.6 Questions 173 Chapter Eight: Epilogue 174 8.1 Looking Back 174 8.2 Looking Ahead 176 Appendix A: Vickrey's Genesis 179 A.1 Introduction 179 A.2 A Preview of Revenue Equivalence 180 A.3* Quick Review of Some Probability Theory 183 A.4* Order Statistics 185 A.5 Revenue of Second-Price Auctions 188 A.6 First-Price Auctions and Nash Equilibria 189 A.7 Revenue Equivalence of First- and Second-Price Auctions with Uniformly Distributed Values 190 A.8 A Nash Equilibrium for First-Price Sealed-Bid Auctions 192 A.9 Revenue of First-Price Auctions 197 A.10* Conditional Expectation 198 A.11 An Interpretation of First-Price Equilibrium Bidding Strategy 200 A.12 Stronger Revenue Equivalence 200 A.13 Dutch Auctions and Strategic Equivalence 202 A.14 Another Kind of Auction--the All-Pay Auction 203 A.15 Questions 205 * Note: Sections providing mathematical background are indicated with an asterisk. Appendix B: Riley and Samuelson's Optimal Auctions 207 B.1 Definition of Riley and Samuelson's Class 207 B.2 Revenue 208 B.3 Optimal Reserve Price 211 B.3.1 Example: First-Price Auction with Reserve 213 B.3.2 Example: Second-Price Auction with Reserve 215 B.4 Sad Losers and Santa Claus 216 B.4.1 The Sad-Loser Auction 217 B.4.2 The Santa Claus Auction 219 B.5 The All-Pay Auction Revisited 222 B.6 Risk Aversion 224 Skim these sections if you don't need the review. B.7 Point of Departure 227 B.8 Questions 227 Appendix C: Myerson's Optimal Mechanisms 230 C.1 Directions 230 C.2 Interdependent Values 231 C.3 Asymmetric Bidders 235 C.4 Efficiency 236 C.5 Myerson's Optimal Mechanism in the Asymmetric-Bidder Case 239 C.5.1 Interlude: Revenue Equivalence Revisited in the Asymmetric-Bidder Case 242 C.5.2 The Optimal Allocation Rule 244 C.5.3 The Payment Rule 247 C.5.4 A Wrinkle 248 C.5.5 Is This Practical? 248 C.6 Optimal Riley and Samuelson Auctions Are Optimal Mechanisms 249 C.7 Auctions vs. Negotiations 249 C.8 Summary 252 C.9 Questions 253 Appendix D: Laboratory Evidence: A Summary 254 D.1 Introduction 254 D.2 Laboratory Experiments 255 D.3 Experimental Results for the IPV Model 256 D.4 Experimental Results for the Common-Value Model 259 References 263 Index 271

About the Author

Ken Steiglitz is Professor of Computer Science at Princeton University. He is the author of "A Digital Signal Processing Primer" and the coauthor of "Combinatorial Optimization: Algorithms and Complexity".


"The book does a lot more than just explain why eBay works the way it does, however. As promised in the subtitle, Steiglitz also explores the quirks of human behavior in auctions, both on eBay and elsewhere, which have as much to do with psychology as with brute economic logic... Steiglitz's book is an admirable achievement: a short, readable account of the economic theory of auctions that doesn't pound the reader into stupefaction with equations or some of the other dry-as-bones notions economists often invoke."--Mark Buchanan, New Scientist "In this interesting, well-written book, Steiglitz summarizes the basic literature on auction theory, with particular emphasis on eBay auctions...It will...be of interest to anyone who wants a basic introduction to auction theory or who uses eBay."--D.F. Sheets, Choice "What Steiglitz does well is discuss the quirks of eBay. He himself is a regular user and this allows him to comment with some authority upon the many different patters of observed behaviour...This is an interesting book, providing a fascinating insight from an important real-world auction market, and this will provide motivation to delve deeper into the subject to many a non-expert reader."--Mark Williams, The Business Economist "General readers interested in either behavioral economics in general, or auction behavior in particular, will find Snipers, Shills, and Sharks to be entertaining and informative read. Naive users of eBay will find it particularly useful since, as Steiglitz points out, many otherwise well-educated and informed people do not truly understand how the system works."--Sarah Boslaugh, MAA Reviews

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