Originally posted on the course-blog for "Strategic Decision Analysis"
This summer, I interned with Manheim Auctions, world’s largest B2B auto-auction company. In addition to my internship projects, I also got a chance to read a lot about auctions in general. One of the articles that I read introduced me to the concept of sniping, where one of the bidders places his bid at the very last moment, giving other bidders no chance to outbid him. Sniping works only in auctions with a fixed end-time, which is the case with most online auctions.
To make things clearer, let us take an example of an English Auction, where three bidders A, B and C place a value of $9000, $10000 and $5000 respectively on a car being auctioned, each of which is much higher than the car value for other bidders. If the auction proceeds in the usual way, the bids will start at the seller’s reservation price (let’s say $3000), proceed in increments of let us say $100, and increase to A’s max value (=$9000), and then, B will outbid him by placing a bid of $9100, and win the auction. This is the usual story.
The twist in the story comes, when A decides to play a sniper, and will completely ignore the auction game being played, till the very last minute. So, the bid starts as usual at $3000, other bidders gradually drop out, and the game is down to two players: B and C. B outbids C at $5100. When the auction is in its very last minute, just when B feels confident that he is going to win, as no one has challenged his bid for last two hours or so, A makes an entry placing a bid of $5200 and steals the game from B.
As expected, B feels cheated. He was ready to pay up to $10000 for the car, but due to sniping by A, he doesn’t even get a chance to do so. The seller feels robbed too! Part of the auction’s magic is how the selling price gradually builds up, when two final players compete for the item. If one of them is absent for the most time, the items sells for less than what it could have sold for.
Sniping is rampant on most auctioning platforms. In fact, many sniping services and software have popped up in the market now, which do sniping on your behalf. As expected, sniping is frowned upon by both sellers and all non-sniping buyers, and although some companies in some regions (Ex: eBay in Germany) have tried to ban it, it’s not easy to prove the intent. How do you differentiate between a sniper, and a casual buyer, who just happened to check that the car is about to be sold for a price that he can happily beat?
eBay’s proxy bidding system is an answer to sniping. (Of course, beating the snipers is not the main objective of the system. It is also time-saving and convenient for the buyers) This combines the elements of second-price auction with the regular auctions. The main auction proceeds as the regular incremental English auction, but if you choose to go by proxy-bidding, you enter the max value that you would be willing to pay, and from then, onwards, the system will play on your behalf. (In the second price auctions, you pay the bid by the second highest bidder, here it is second highest bid plus the minimum incremental bid). It literally takes 0 seconds for the system to place a higher bid on your behalf.
Going back to our car auction, even though A may have entered in the last minute and placed the bid of $5200, the proxy bidding system, playing on B’s behalf, will beat him by placing $5300 and winning the auction for B, the deserving winner. Thus, the sniper can win only if he had bid beyond B’s max willingness to pay.
You may question that though this is fair on the buyer’s side, the seller is still not much better off with this system, getting just $5300 instead of $9100, which he could have got in a fairer world. You are partially right, but the idea is that when A loses out again and again, this may act as a deterrent for him in future. He doesn’t know B’s max WTP and may think that he could have got it for maybe $7000, had he played fairly. Once the snipers know that they are failing, and become regular players again, the fairness of the game will be restored, and the seller will get his due price.