Although e-Bay is “essentially a second price auction,” the mechanics of the system creates an environment that doesn’t follow the implications of a second price auction. The proxy bidding allows each bidder to bid up to his max bid, which, in most cases, should be his true value. The price that he pays would be the second highest max bid of all the bidders, which the e-bay system keeps track of. Unlike the normal second price auction, however, e-Bay has the highest bid listed as well as a deadline for each listing, which allows people to “snipe” a listing with a last minute bid.

Sniping has become one of the staple ways to win a bid against who would normally outbid you. It prevents a bidding war, where two or more bidders continuously try to outbid each other until another person reaches their max bid, which is how an auction is supposed to work. Instead, on e-Bay, many of the bidders are concerned with getting a good deal, and thus, do not always bid the perceived true value of the item. If one bids low early in the auction, the competing bidders have a more difficult task of predicting the value of the winning bid, so the bids on a listing are often low compared to the last 10 minutes of the bidding. By bidding at the last minute, one can win the auction without having the personal highest max valuation, all because no one else can respond.

Although sniping is a very effective strategy, ultimately, for the rational (or less patient) individual, bidding one’s true value is still the dominant strategy. It may not secure the best deal, or sometimes, not even the item itself, but it is the most rational strategy. As e-Bay auctions can last anywhere from hours to weeks, the dominant strategy also becomes the best way to save time.

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