week 5 1 COS 444 Internet Auctions: Theory and Practice Spring 2008 Ken Steiglitz

week 52 Some details of eBay’s Algorithm Normal case (assume tick = $1) : Normal case (assume tick = $1) : $ high bid $ high bid 12 ……… minimum allowable bid 12 ……… minimum allowable bid 11 ……… posted (will be paid) 11 ……… posted (will be paid) 10 ……… second-highest bid 10 ……… second-highest bid

week 53 Some details of eBay’s Algorithm Suppose next bid is $19.90 : Suppose next bid is $19.90 : $ minimum allowable bid $ minimum allowable bid 20 ……… high bid (posted, paid) 20 ……… high bid (posted, paid) second-highest bid second-highest bid

week 54 Some details of eBay’s Algorithm Suppose next bid is, instead, $20.10 : Suppose next bid is, instead, $20.10 : $21.10 …. minimum allowable bid $21.10 …. minimum allowable bid …. high bid (posted, paid) …. high bid (posted, paid) 20 ……… second-highest bid 20 ……… second-highest bid If now high bidder raises her bid to $21.10 or higher, her posted price --- which she would pay, goes up! This is basis of a law suit which she would pay, goes up! This is basis of a law suit

week 55 Theory A slick way to derive equilibrium: use value space We assume a 1-1 bidding function b(v). Then if bidder 1 bids b(z), the equilibrium condition is that surplus be maximized when z = v 1. This corresponds to bidding b(v 1 ).

week 56 Field Experiment “ Public Versus Secret Reserve Prices in eBay Auctions: Results from a Pokémon Field Experiment,” R. Katkar & D. Lucking-Reiley, 1 December 5, “We find that secret reserve prices make us worse off as sellers, by reducing the probability of the auction resulting in a sale, deterring serious bidders from entering the auction, and lowering the expected transaction price of the auction. We also present evidence that some sellers choose to use secret reserve prices for reasons other than increasing their expected auction prices.” “We find that secret reserve prices make us worse off as sellers, by reducing the probability of the auction resulting in a sale, deterring serious bidders from entering the auction, and lowering the expected transaction price of the auction. We also present evidence that some sellers choose to use secret reserve prices for reasons other than increasing their expected auction prices.”

week 57 Field Experiment… Katkar & L-R matched pairs of Pokémon cards 50 matched pairs of Pokémon cards 30% book value, open & secret reserve 30% book value, open & secret reserve Open reserve increased prob. sale: 72% vs. 52% Open reserve increased prob. sale: 72% vs. 52% Open reserve yielded 8.5% more revenue Open reserve yielded 8.5% more revenue Caution: these are low-priced items! Caution: these are low-priced items! What are possible pros of secret reserve? What are possible pros of secret reserve? Evidence of illicit transactions around eBay Evidence of illicit transactions around eBay

week 58 Theory Here’s a different kind of auction: Here’s a different kind of auction: High bidder wins the item All bidders pay their bids! All bidders pay their bids! … the All-Pay Auction Models political campaigning, lobbying, bribery, evolution of offensive weapons like antlers,… etc. What’s your intuiton? How do you bid? Is this better or worse for the seller than first-price? Second-price?

week 59 Theory: all-pay auction  Start with E[surplus] = pr[1 wins][ v 1 ] – b ( v 1 ) … equilibrium … equilibrium

week 510 Praxis: Reasons to snipe  Avoids bidding wars  Avoids revealing expert information (if you are an expert) (if you are an expert)  Avoids being shadowed  Possibly conceals your interest entirely  Ockenfels & Roth (2006) suggest implicit collusion (prisoner’s dilemma) Nonstrategic:  Avoids early commitment

week 511 Praxis: Reasons to bid early Scaring away competition Scaring away competition Raising one’s own bid even scarier Raising one’s own bid even scarier Impatience, anxiety, pride Impatience, anxiety, pride Rasmusen (2006) suggest cost of discovery leads to a collusive equilibrium Rasmusen (2006) suggest cost of discovery leads to a collusive equilibrium Allows you to sleep, eat, etc. (But sniping services and software solve this problem.) Allows you to sleep, eat, etc. (But sniping services and software solve this problem.)

week 512 Praxis: Field studies of early and late bidding Roth & Ockenfels papers Roth & Ockenfels papers eBay, Amazon, and Yahoo rules eBay, Amazon, and Yahoo rules (Yahoo now out of the auction business) (Yahoo now out of the auction business) Open Problem: How can a seller encourage early bidding? Open Problem: How can a seller encourage early bidding?