Different Auction Institutions

1. Different Auction Institutions • English Auction– begin with lowest acceptable price and solicit higher bids until no more increases– then item is “sold.” • Dutch Auction – auctioneer begins by asking a high price and gradually lowers the price until some bidder shouts “mine”. • First Price Sealed Bid – Each bidder submits one bid and item is given to highest bidder for the price given by highest bidder. • Vickrey Second Price Sealed Bid-Each bidder submits one bid and item is given to highest bidder for the price given by SECOND highest bidder.

2. Common Value vs. Private Value • Common Value Auctions= Everyone has the same value. Example: Mineral rights auctions, the auction in class with the roll of quarters • Private Value Auctions = Items for private consumption. Different people have different values.

3. Revenue Equivalences • With independent private value auctions, no risk aversion, and reserve price.

4. Strategic Equivalences Among Auction Institutions • Dutch = First Price Sealed Bid • A bidder who selects his actions in advance in the Dutch auction: Selects a single price, “bid,” he would agree to accept E(Profit|Bid) = Prob(Win|Bid)*(Value – Bid) • When the Dutch and First Price Sealed bid are modeled as “strategic form games” the sets of strategies and outcomes are identical.

5. Strategic Equivalence between English and Second Price Sealed Bid • English Auction = Second Price Sealed Bid • Best (dominant) strategy in Second Price Sealed Bid auctions: Bid your TRUE value. In English auctions, keep raising as long as the winning price is less than your TRUE value.

6. In laboratory experiments … • Winning bidders in experiments tend to pay a lower price in the Dutch auction than in the first price sealed bid. • Bidders in second price sealed bid often bid more than their true value

7. Fixed vs. non-fixed end time • Auctions on eBay have a fixed end time, while auctions on Amazon, which operate under otherwise similar rules, do not have a fixed end time, but continue if necessary past the scheduled end time until ten minutes have passed without a bid. • The strategic differences in the auction rules are reflected in the auction data by significantly more late bidding on eBay than on Amazon. Furthermore, more experienced bidders on eBay submit late bids more often than do less experienced bidders, while the effect of experience on Amazon goes in the opposite direction.

8. The basic rules of Amazon and eBay auctions • Second price auctions (bidders may submit their reservation price (also called a proxy bid); the resulting bid registers as the minimum increment above the previous high bid, and rises until it is reached, or until it exceeds the minimum increment over the next highest reservation price). The winning bidder is therefore the one who has submitted the highest reservation price, and the price he pays is the minimum increment over the second highest reservation price. • Auctions typically run for several days. • eBay auctions have a fixed deadline. • Amazon auctions are automatically extended for an additional 10 minutes from the time of the latest bid.   • Multiple and late bidding in eBay auctions

9. Multiple bids and sniping • Why are they related? • In an exploratory sample of just over 1000 completed eBay auctions sampled in May and June 1999, 28% had 0 bidders, 16% had exactly 1 bidder, and of the remaining 585 auctions, 74% showed multiple bidding (at least one bidder raised his reservation price in the course of the auction), and 18% had bids in the last sixty seconds. • There is substantial variation in the percentage of last-minute bids. The highest percentage in this sample was in the category Antiques—Ancient World, in which 56% of the auctions that attracted more than one bid had bids in the last sixty seconds, while the lowest such percentage was in Collectibles: Weird Stuff: Totally Bizarre, where it was 0%.

13. Experts on Sniping • eBay.com’s view (1999) • “eBay always recommends bidding the absolute maximum that one is willing to pay for an item early in the auction. eBay uses a proxy bidding system. (…) Thus, if one is outbid, one should be at worst, ambivalent toward being outbid. After all, someone else was simply willing to pay more than you wanted to pay for it. If someone does outbid you toward the last minutes of an auction, it may feel unfair, but if you had bid your maximum amount up front and let the Proxy Bidding system work for you, the outcome would not be based on time." • A seller’s view (Axis Mundi, 1999) • "THE DANGERS OF LAST MINUTE BIDDING: Almost without fail after an auction has closed we receive emails from bidders who claim they were attempting to place a bid and were unable to get into eBay. There is nothing we can do to help bidders who were "locked out" while trying to place a "last minute" bid. All we can do in this regard is to urge you to place your bids early. If you're serious in your intent to become a winning bidder please avoid eBay's high traffic during the close of an auction. Its certainly your choice how you handle your bidding, but we'd rather see you a winner instead of being left out during the last minute scramble."

14. Roth and Ockenfels (2000) • Sniping can be in equilibrium in eBay • Intuition: • There is a cost to relying on a last minute bid, since it has a positive probability that it will fail to register in the auction. • But there will also be an incentive not to bid too high when there is still time for other bidders to react, to avoid a bidding war that will raise the expected final transaction price. • The incentive for mutual delay until the last minute in eBay comes from the positive probability that another bidder’s last minute bid will not be successfully transmitted. Thus at this equilibrium, expected bidder profits will be higher (and seller revenue lower) than at the equilibrium at which everyone bids true values early. • So at equilibrium, buyers may bid both early and at the very last moment.

15. Shill bidding • Press ReleaseFor Immediate ReleaseMarch 8, 2001 The sixteen-count indictment charges ___ of Placerville, California; ___ of Sacramento, California; and ___ of Lakewood, Colorado, with wire fraud and mail fraud for making the fraudulent bids, also known as "shill bids." The fraud counts each carry a sentence of up to five years in prison and a $250,000 fine. According to Assistant U.S. Attorneys, the Indictment alleges that the defendants created more than 40 User IDs on eBay using false registration information, and then used those aliases to place fraudulent bids to artificially inflate the prices of literally hundreds of paintings they auctioned on eBay from November 1998 to June 2000.According to the Indictment, the defendants shielded their true identities from eBay by providing bogus names, postal addresses, and telephone information, and by providing e-mail addresses obtained from free e-mail providers known to collect little or no verifiable information on their account holders. By creating multiple User IDs, the defendants intended to trick other eBay users into believing that the "shill" bids they placed on each other’s items were legitimate.

16. The Winner’s Curse (in common value auctions) • A painting contractor’s testimony: “I do most of my work for a few builders that I have known for years. My estimates of what it will cost to do a job for one of them come out about right. Sometimes a little high, sometimes a little low, but about right overall. Occasionally, when business is slow, I bid on a big job for another builder, but those jobs are different: They always run more than I expect.”

17. eBay Case: Alliances • What was the deal with AOL? • $75 million • What does eBay get? • What does AOL get? • Exclusive link, co-branding, advertising revenues • What does Amazon have to do with it? • How important is the relationship w/ AOL? • 800-pound gorilla • 17 mil users, half the Internet

18. eBay Case: Policing • When eBay executives talk of being proactive, what do they mean? • Why did eBay become proactive? • Illegal goods (assault weapons, drugs), copyright infringement, fraud, bad press, public perception, competitive advantage, size was too large to rely on community policing • How did eBay become proactive • Cooperated with software association, Technology tools to do automatic keyword searches, eliminated bad categories, enhanced legal buddy program • What kind of policing is required? • Pirated items, Illegal or “bad’ items, authenticity of collectors’ items, non-performance on contract, shill bidding • What are pros and cons of policing? • Cons: Very costly, assumption of responsibility, upsetting free speech. Pros: Avoiding lawsuits, keeping competitive adv.

19. eBay Case: Switching costs and stickiness • What are some switching costs on web sites? • How does eBay maintain high switching costs? • Socializing– building a community, quality ratings • Why are collectors so significant in eBay’s revenues? • Items not sold in stores, tend top form communities which are sticky • Is eBay’s business model changing and if so, does it increase stickiness? • Is Amazon an important competitor? If not, who is? Why?

20. Amazon • What were the business models in Amazon’s evolution? • Following the post-bubble transformation from retailer to commerce platform (p.9), what’s the difference? Advantages? Disadvantages? • What’s the difference betwn the retail and marketplace models? • How do auctions fit within the single-store vision? How do zShops? • Compare the fee structure of eBay and Amazon (exhibit 7a)

21. Pricing • P. 278 • Retail Price Decisions: • HiLo, EDLP, • Basic Pricing Strategies: • Cost-plus, Brand (prestige)-pricing, Trial, Switching costs, Loss-leaders • Dynamic Pricing Decisions– • Auctions, exchanges • Advanced Pricing Strategies– • 1st degree Price Discrimination, 2nd degree, 3rd degree, two-part pricing, bundling