Most keen eBayers have probably been beaten by a last minute bid or used sniping software to gain a bidding advantage, but how common is the practise? A paper entitled Last Minute Bidding and the Rules for Ending Second Price Auctions: Evidence from eBay and Amazon Auctions by Alvin Roth et al (2002), published in the American Economic Review examines the phenomenon. This paper examines the differences in last minutes bidding behaviour between eBay and Amazon.
eBay is different from most off line auctions, and also Amazon auctions, in that it has a “hard close” – an ending time for an the auction. Amazon and traditional offline (English) auctions, extend until the last person has finished bidding. The hard close on eBay auctions has lead to the practice of sniping – last minute bidding with the intention of not allowing competitive bidders the chance to place a higher bid – and hence getting the item for a cheaper price. These different rules give bidders more reason to bid late on eBay and Amazon.
The authors identify 3 reasons for late bidding in eBay:
- Response to naive English auction behaviour. Bidding late to avoid bidding wars with incremental bidders
- Collusive Equilibrium. Bidders bid late to avoid bidding wars with other like minded bidders
- Informed bidders protecting their information. Bidders like dealers who know the true value of an item, bid late to protect their knowledge advantage.
In Amazon, the auction closes 10 minutes after the last bid has been made, which renders these tactics ineffective.
By analysing a large number of eBay and Amazon auctions, Roth et al made the following observations:
- 20% of all bids on eBay compared to 7% of all last bids on Amazon were submitted in the last hour.
- In 66% of eBay auctions there is bidding activity in the last hour, whilst this is only true for 25% of Amazon auctions.
- On eBay a considerable share of bidders submit their bids in the last five minutes (9% in computers and 16% in antiques), whilst only a few bids come in equally late on Amazon (about 1% in both categories)
- Most strikingly 40% of computer and 59% of antique antique have bids in the last 5 minutes compared with about 3% on Amazon.
- Finally, feedback was positively correlated with late bidding, showing that it is a tactic employed by more experienced bidders. Sniping is therefore a strategic response to eBay’s auction rules.