EBay Or Not To eBay?
From the Briefcase: Research produced by America's Best Business Schools
"EBay bidders are quite sophisticated and their behavior is consistent with theories of rational bidding," says Zeithammer.
In sequential auction markets like eBay, the burden of analysis (and the task of setting market prices) is on buyers, because they have to take sellers' inventory and competition from other buyers into account when forming their bids. As eBay expands into new markets and the number of auctions per hour increases, it becomes even more important for bidders to take their bidding options into consideration. On the flipside, sellers should be careful when formulating their own strategy, avoiding the sale of the same items back to back.
To Shade or Not to Shade
EBay lists auctions for a given item in a sequence ordered by ending time (the default order) and allows bidders to place known future auctions on their private watch list. Bidders determine their maximum bid for an item, and eBay automatically enters bids up to this maximum amount. Zeithammer modeled each individual auction as an instantaneous auction where all bidding occurs at the end. Most bidding on eBay does take place at the very end of each auction, not giving the competitive bidders time to react to each other's bids.
"Between the beginning and end of an auction, a bidder can gather information about similar items and upcoming auctions," says Zeithammer. "There's no reason to commit to a bid until the very end."
In Zeithammer's model, one auction ends before the next one starts, and several upcoming auctions are already known. The bidders are assumed to be both forward-looking in that they anticipate a future auction, and forward-seeing in that they know detailed information about products that will be sold in several future auctions. Auctions ending in the next hour are highlighted in red, so the number of near-future products is easier to determine than the specific attributes of the items sold.
Each bidder has a personal "valuation" of the product–the maximum price the bidder is willing to pay. Zeithammer argues that bidding exactly this valuation would be too high, because it would expose the bidder to winning immediately, and foregoing future opportunities to obtain a better price for the same item. Instead, Zeithammer suggests that bidders should bid far less than their valuations–a strategy referred to as "shading." Rational bidders shade their bids down in sequential auctions because winning involves not only the monetary cost of paying for the item, but an additional opportunity cost arising from not participating in future auctions for the same good. Because of the shading phenomenon, bids are always negatively biased measures of the bidders' true value of items.
The key prediction of the theory of "forward-seeing" bidding is that bidders should shade more when there are more items coming up for auction within the next hour, and when more of those items are personally desirable to the bidders. Thus, shading should increase or decrease as a function of the specific items sold in upcoming auctions.
Real-World Bidding Strategies
How much detail about future auctions do real eBay bidders use? To address this question, Zeithammer measured the relationship between current bids, types of upcoming objects, and the ending times of upcoming auctions. In the most sophisticated version of Zeithammer's model, each bidder examines future auctions closely and bases his or her bidding strategy on timing as well as types of objects coming up for sale.
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