Snipers, Shills, and Sharks: eBay and Human Behavior

Preface     xiiiTo the general reader     xiiiTo students and course instructors     xivSynopsis     xvAcknowledgments     xixEnglish and Vickrey Auctions     1Auctions     1A Brief History     5English Auctions     8Variations on the English Theme     10Truthful Bidding is Dominant in (Japanese Button) English Auctions     12Sealed-bid Second-Price (Vickrey) Auctions     14Mail-bid Auctions     16Weak Strategic Equivalence of (Japanese button) English and Vickrey Auctions     17The Four Standard Auctions and Why They Are Two Pairs     18Disincentives to truthful bidding     21Questions     22From Vickrey to eBay     25eBay as an Evolutionary Product of Vickrey: The California Auction     25Other Online Auction Rules     28eBay [not equal] Vickrey     30Summary     32Questions     32eBay Strategies Observed     34Some Bidding Histories     34Start and End Clustering, Snipers     34A Bidding War     36An Early Bidder andHer Fate     38"Enter Your Maximum, Then Sit Back and Watch!"     39Good Reasons to Snipe     40Other (Generally Good) Reasons to Snipe     43Bidding Wars, Response to Incremental Bidding     43Implicit Collusion     44Nonstrategic Reasons to Bid Late     45Some (Questionable) Reasons to Bid Early     46Uncertain Values and the Cost of Discovery     46Scaring Away Competition     47Nonstrategic Reasons to Bid Early     50On Balance, Snipe     51Seller Choices     51Opening Bid     52Use of a Secret Reserve     54Use of the Buy-It-Now Option     56Other Seller Choices     57The Next Three Chapters     60Questions     61What If eBay Were First-Price?     65First-Price Is the More Natural Assumption     65The Sealed-Bid First-Price Auction     66The Simplest of All Worlds     67The Independent Private Values (IPV) model     67How to Shade     71Revenue: The Bottom Line     73A First-Price eBay Would Discourage Early Bidding      74First-Price Is More Work for the Bidder     75Further Theory Disappoints     76Conclusion     77Questions     78The Signals that Sellers Send     79Reserves     79Price Estimates and Related Revelations     81Virtue Rewarded, in Theory     83Art, Silver, and Jewelry Auctions: Empirical Observations of Seller Price Estimates     86The Complexity of the Seller's Signaling     88What Theory Has To Say About Reserves     90The Tradeoff in Second-Price Auctions     91The Tradeoff in First-Price Auctions     91The Optimal Reserve     92The New Equilibrium     92Practical Implications     94Field Experiments     95A Field Comparison of Public vs. Secret Reserves on eBay     99Lucking-Reiley's Magic Window in Time     100Field Confirmation of Some First-Price Theory     101Flatness of Revenue vs. Reserve Curves     102The Importance of the Extra Bidder     104Extracting Some Advice for the eBay Seller     105Questions     107Prices!     108Appraising the Scaffolding      108Valuations     109Equilibrium     111Homo economicus     111Overbidding: Some Classroom Experiments     112Experiment 1: First-price with Uniformly Distributed Valuations     113Experiment 2: First-Price with Less Competition     114Feedback and Learning     116Feedback in First-Price Auctions     117Feedback in Second-Price and English Auctions     117Overbidding: Jars of Nickels     118Results from the Field: Tests of Revenue Equivalence     120Magic on the Internet: A Surprise     121Music CDs and Xboxes on eBay     123Reconciliations     125Equilibrium Regained     125Risk Aversion     126Spite: An Alternative Theory     130The Theoretically Informed (and Human) eBay Bidder     134Simply a Mistake: Bidding Untruthfully in Vickrey's Setting     135The Winner's Curse     135Lessons from the Failures of Revenue Equivalence     137Spiteful Behavior     138Wars, Frenzies, and Bubbles     140Questions     147Transgressions     150Shills      150Shill Bidding and Theory     155Mock Auctions: The More Important Diamond     157Bidder Rings: 84 Charing Cross Road     158Ethics     162The Twinge of Guilt: The Buyer Withholds Information     162Conversely: The Seller Withholds Information     163Sniping     164Shadowing Bidders     164The Ethics of Feedback     165Exporting and Importing Ancient Artifacts     166A Note on Downright Fraud     168Fakes     169Questions     173Epilogue     174Looking Back     174Looking Ahead     176Vickrey's Genesis     179Introduction     179A Preview of Revenue Equivalence     180Quick Review of Some Probability Theory     183Order Statistics     185Revenue of Second-Price Auctions     188First-Price Auctions and Nash Equilibria     189Revenue Equivalence of First-and Second-Price Auctions with Uniformly Distributed Values     190A Nash Equilibrium for First-Price Sealed-Bid Auctions     192Revenue of First-Price Auctions     197Conditional Expectation      198An Interpretation of First-Price Equilibrium Bidding Strategy     200Stronger Revenue Equivalence     200Dutch Auctions and Strategic Equivalence     202Another Kind of Auction-the All-Pay Auction     203Questions     205Riley and Samuelson's Optimal Auctions     207Definition of Riley and Samuelson's Class     207Revenue     208Optimal Reserve Price     211Example: First-Price Auction with Reserve     213Example: Second-Price Auction with Reserve     215Sad Losers and Santa Claus     216The Sad-Loser Auction     217The Santa Claus Auction     219The All-Pay Auction Revisited     222Risk Aversion     224Point of Departure     227Questions     227Myerson's Optimal Mechanisms     230Directions     230Interdependent Values     231Asymmetric Bidders     235Efficiency     236Myerson's Optimal Mechanism in the Asymmetric-Bidder Case     239Interlude: Revenue Equivalence Revisited in the Asymmetric-Bidder Case     242The Optimal Allocation Rule      244The Payment Rule     247A Wrinkle     248Is This Practical?     248Optimal Riley and Samuelson Auctions Are Optimal Mechanisms     249Auctions vs. Negotiations     249Summary     252Questions     253Laboratory Evidence: A Summary     254Introduction     254Laboratory Experiments     255Experimental Results for the IPV Model     256Experimental Results for the Common-Value Model     259References     263Index     271

\ MAA ReviewsGeneral readers interested in either behavioral economics in general, or auction behavior in particular, will find Snipers, Shills, and Sharks to be entertaining and informative read. Naïve users of eBay will find it particularly useful since, as Steiglitz points out, many otherwise well-educated and informed people do not truly understand how the system works.\ — Sarah Boslaugh\ \ \ \ \ New Scientist\ - Mark Buchanan\ The book does a lot more than just explain why eBay works the way it does, however. As promised in the subtitle, Steiglitz also explores the quirks of human behavior in auctions, both on eBay and elsewhere, which have as much to do with psychology as with brute economic logic. . .. Steiglitz's book is an admirable achievement: a short, readable account of the economic theory of auctions that doesn't pound the reader into stupefaction with equations or some of the other dry-as-bones notions economists often invoke.\ \ \ Choice\ - D.F. Sheets\ In this interesting, well-written book, Steiglitz summarizes the basic literature on auction theory, with particular emphasis on eBay auctions...It will...be of interest to anyone who wants a basic introduction to auction theory or who uses eBay.\ \ \ \ \ The Business Economist\ - Mark Williams\ What Steiglitz does well is discuss the quirks of eBay. He himself is a regular user and this allows him to comment with some authority upon the many different patters of observed behaviour...This is an interesting book, providing a fascinating insight from an important real-world auction market, and this will provide motivation to delve deeper into the subject to many a non-expert reader.\ \ \ \ \ MAA Reviews\ - Sarah Boslaugh\ General readers interested in either behavioral economics in general, or auction behavior in particular, will find Snipers, Shills, and Sharks to be entertaining and informative read. Naïve users of eBay will find it particularly useful since, as Steiglitz points out, many otherwise well-educated and informed people do not truly understand how the system works.\ \ \ \ \ New ScientistThe book does a lot more than just explain why eBay works the way it does, however. As promised in the subtitle, Steiglitz also explores the quirks of human behavior in auctions, both on eBay and elsewhere, which have as much to do with psychology as with brute economic logic. . .. Steiglitz's book is an admirable achievement: a short, readable account of the economic theory of auctions that doesn't pound the reader into stupefaction with equations or some of the other dry-as-bones notions economists often invoke.\ — Mark Buchanan\ \ \ \ \ ChoiceIn this interesting, well-written book, Steiglitz summarizes the basic literature on auction theory, with particular emphasis on eBay auctions...It will...be of interest to anyone who wants a basic introduction to auction theory or who uses eBay.\ — D.F. Sheets\ \ \ \ \ The Business EconomistWhat Steiglitz does well is discuss the quirks of eBay. He himself is a regular user and this allows him to comment with some authority upon the many different patters of observed behaviour...This is an interesting book, providing a fascinating insight from an important real-world auction market, and this will provide motivation to delve deeper into the subject to many a non-expert reader.\ — Mark Williams\ \