Although the VCG mechanism reproduces market-clearing prices in second-price auctions, it has several shortcomings that pose great threats to reliant sites such as eBay, Google, and Yahoo. Sellers sometimes use shill bids to artificially drive up the price of goods and provoke bidding wars among auction participants. This behavior is notoriously difficult for sites such as eBay to detect, especially when sellers collude. Kenneth Walton, author of FAKE: Forgery, Lies, and eBay, and his partners submitted shill bids in hundreds of eBay auctions before being convicted of fraud by the United States Attorney. Never the less, how should eBay combat shill bidding and preserve the integrity of its online marketplace?

eBay’s homegrown solution the shill bidding epidemic, the SMI (Safeguarding Member IDs) policy, seems to be doing more harm than good. Many members of eBay community are concerned that this anonymity may make shill bidding more difficult to detect. A recent article at AuctionByte.com believes that this policy may also discourage buyers from bidding on expensive items due to the lack of “transparency.” I stumbled across an article that I believe proposes the right solution.

The School of Electronics and Computer Science at the University of Southampton has proposed a new fee structure. eBay requires sellers to pay a fee for settings a minimum price on their goods; researchers at the ECS found that sellers often circumvent this fee by placing a shill bid instead. Under their proposed fee structure, sellers would be charged a percentage of the difference between the set minimum price and the final selling price. They believe this will simultaneously discourage shill bidding and encourage the setting of minimum prices. I believe this non-legislative solution could be highly effective at reducing the incidence of shill bidding in online auctions.