In class, we’ve talked about auctions and specifically about Second Price Auctions.  As it says in our textbook, “The auction form use on eBay is essentially a second-price auction” and this makes sense.  On eBay, the winner at the end pays only the 2nd highest bid since eBay will incrementally increase your bid until it just beats the 2nd highest bidder.  Even if you bid higher (your valuation is higher) eBay will not make you pay that higher bid.  Therefore, the discussion of the bidder’s dominant strategy being to just bid the bidder’s valuation for the item outright is very pertinent to eBay.  In fact, eBay even tells us this strategy outright in it’s Tips to Bidding saying, “When you place a bid, we suggest that you enter the maximum amount that you’re willing to pay for the item.”

In this article written by Chris Gaylord from the Christian Science Monitor,  it seems like there’s a bit more psychologically than just winning an item and receiving that item: it literally is “winning” that item.  This can easily be seen through a feature that some sellers can use called “Buy Now”.  This feature allows the seller to sell immediately to a buyer who is willing to pay the “Buy Now” price that the seller has set.  For the buyer, this means the buyer’s valuation is higher than the seller’s and therefore would not have to go through the entire auctioning process to win the item.  There are occasions where the bidding will actually surpass the “Buy Now” price (the feature disappears after a set number of bids or price) but if everyone followed this dominant strategy, this outcome should never happen.  Beyond the mechanic nature of the dominant strategy though is the idea of actually winning the bidding.  As it says in the article, this is called calor licitantis or bidder’s heat.  Essentially, the bidders get so wrapped up in bidding against each other, that the price is driven up because the valuation of the item to each bidder is now compared to other bidders.  In fact, about 45% to 50% of iPod auctions on eBay with a “Buy Now” price had those prices surpassed in the actual bidding.  Fun eh?

Finally, there’s also an interesting notion about when we should bid.  This portion never seemed to be mentioned in class, but I expect it was because it makes the auctioning more complicated.  I believe part of the reason for this increase in prices is partly due to the fact that there isn’t only one submission for a bid, but that we can continually raise our bids until we feel like stopping or the bidding is over.  This means, according to game theory, we’re not only playing one game and submitting bids without having knowledge of the other bids and bidders, but instead we get the opportunity to see what the current highest bid is, and then recalculate our valuation on the item at hand.  This means that the dominant strategy only really holds if everyone bid at the same time, and not in this countdown fashion.  Interestingly enough, the more bids early on an item, the more attention is drawn to that item and the higher likelyhood that the ending price will be higher.  Therefore the idea is to bid as late as possible at the valuation that you decided upon initially.  Win or lose, at least you won’t pay more than you originally intended to.

Sources:

http://www.csmonitor.com/2007/0716/p13s02-wmgn.htm

http://pages.ebay.com/help/buy/bidding-ov.html#about