The Effects of Proxy Bidding and Minimum Bid Increments within eBay Auctions

Abstract

We present a mathematical model of the eBay auction protocol and perform a detailed analysis of the effects that the eBay proxy bidding system and the minimum bid increment have on the auction properties. We first consider the revenue of the auction, and we show that when bidders use the eBay proxy bidding system there is an optimal value for the minimum bid increment at which the auctioneer’s revenue is maximised. We then show that the minimum bid increment also introduces an inefficiency to the auction, whereby bidders who enter the auction late may find that their valuation is insufficient to allow them to advance the current bid by the minimum bid increment (and this may occur despite them actually having the highest valuation for the item). Finally, we use these results to consider appropriate strategies for bidders. We show that whilst last minute bidding (sniping) is an effective strategy against bidders engaging in incremental bidding (and against those with common values), in general, delaying bidding is disadvantageous. Thus, when several bidders submit last minute bids, we show that rather than seeking to bid as late as possible, a bidder should try to be the first sniper to submit their bid (i.e. they should ‘snipe before the snipers’).

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