A USA Today article, On Ebay, it pays to snipe, talks about the strategy of “sniping,” which is described as “waiting for the very last second to submit your bid” for an item. Ebay has a form of auctioning called Second Price auctions. Second price auctions have a dominant strategy for bidders where it is strategically rational for a bidder to ALWAYS bid their true value. In a second price auction, the bidder should always place his/her optimal bid.

This article discusses how timing plays a role for placing bids and how this can be used as a rational strategy to win. The article talks about “sniping” as a rational and effective strategy to win in an auction, which is not a consideration in a second price sealed-bid auction. Ebay is more unique than a typical second price auction because there are deadlines for bidding, which has created a rise in “sniping.” Tom Campbell, president of eSnipe, and Mark Schwartz, CEO of Auctiva, which runs a service called Auction Sniper, claim “sniping is almost exclusively an eBay phenomenon, aided by the site’s large user base and fixed time limits on auctions.”

Harvard economist Alvin Roth makes an important point that points out important concepts learned in class about second price auctions. He suggests that each bidder should form a value for an item so they will not be affected by the “bidding war” and end up paying more than they actually value the item. Ultimately, if a bidder wins with a bid higher than his value for the item, he is at a loss. The bidder wants to win when the amount he pays is less than his value, NEVER more. This emphasizes the point that bidders should always be bidding their value, which is a bidder’s dominant strategy. He goes on further saying “if they know what proxy bid they want to submit, it won’t hurt them to submit it very near the end.” The analysis by South Korean physicists explicitly shows that “the winning strategy is to bid at the last moment as the first attempt rather than incremental bidding from the start.

Timing can be an important factor in Ebay auctions. There are even hosted services, which include Esnipe and AuctionSniper, and services that offer software to place bids seconds before the auction ends, such as Auction Sentry. Furthermore, there are services allowing snipers to place bids on the same item in multiple auctions. When a sniper wins one auction for the item, the bids in all other auctions are canceled.

Timing can however be unimportant. For example, assume all bidders are rational so all bidders place a bid equivalent to how much they value the item. If I value an item for $5 and another bidder values the same item at $10, it would not make a difference for me to place the bid 5 hours before the auction ends or placing the bid 5 seconds before the auction ends. Once that second bidder places his bid, I will no longer be the winner of the auction because I only value the item at $5 and nothing more. In this case, it doesn’t matter if sniping has occurred. The second bidder will be the winner of the auction once he places his bid (assuming there are only two bidders).

Article link 1: http://www.usatoday.com/tech/science/columnist/2006-06-25-physics-of-ebay_x.htm

Article link 2: http://www.wired.com/techbiz/media/news/2002/09/55204?currentPage=all