Lecture 18: Auctions: Ebay and Amazon.

ECON30010 Microeconomics

Monday, 11 May 2015

The material of this lecture is based on Roth, Ockenfels (2002): Last-Minute Bidding
and the Rules for Ending Second-Price Auctions: Evidence from eBay and Amazon
Auctions on the Internet,
http://web.stanford.edu/class/cs206/roth-ockenfels.pdf
If you are interested in this topic, experimental evidence is available in Ariely, Ockenfels
and Roth (2005): An experimental analysis of ending rules in Internet auction,
http://people.duke.edu/~dandan/Papers/Other/auctionRAND.pdf
Example is mine.
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Lecture 18: Auctions: Ebay and Amazon.

Monday, 11 May 2015

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Ebay and Amazon.com Auctions

In 1999, two auction platforms: eBay and Amazon.


 























 

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the major difference between eBay auctions and Amazon auctions: a
lot of bids submitted on eBay in the last seconds of bidding, but there is

almost no activity in the last seconds on Amazon.

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Why?

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Lecture
18: Auctions:
and Amazon.
Monday,
11 May ' 
2015


 
 
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Designing auctions: common details

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A bidder submits highest possible bid

The system bids up to the highest bid
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If the current bid + increment is less than your highest bid, the system
submits a bid + increment on your behalf;
If bid + increment is more than your highest bid, the system stops
bidding (and inform you that you have been out-bid);
(Unimportant detail: feel free to ignore) If bid + increment is exactly equal
to your highest bid, then the system bids your highest bid. Since you
submitted your highest bid to the system before the other bid was placed,
your bid wins.

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Lecture 18: Auctions: Ebay and Amazon.

Monday, 11 May 2015

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Designing auctioins: the main difference

When the auction stops?

On both platforms, there is the end time of the auction, say 9:24:17
I

On eBay, the action will end at end time. The bid received at 9:24:18
will not count.

On Amazon, any new bid automatically extends the auction time by

10 min.

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Lecture 18: Auctions: Ebay and Amazon.

Monday, 11 May 2015

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Theory: why late bidding? Common values



 























 

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First, let us look at the difference between two eBay auctions: for
computers and for antiques.


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Computer: no bidder is likely to have a superior information about

the good;
Antiques: the value of the item is much more difficult to evaluate and
an expert may have far superior information.

An expert may be worried about revealing her bid, promting other buyers
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to increase their bids.
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Lecture 18: Auctions: Ebay and Amazon.

Monday, 11 May 2015

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Theory: why late bidding? Bidders collusion

However, we see that eBay computer auctions also have a lot of

late-minute bidding. How could we explain it
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Behavioural explanations (e.g. if some bidders confuse eBay auction

with an English auction): we will not discuss these explanations;
Implicit collusion of bidders against a seller.
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The bidders prefer to gamble: getting the object at a lower price,

but with lower probability is better than getting the object at a very
high price, but with high probability.

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Lecture 18: Auctions: Ebay and Amazon.

Monday, 11 May 2015

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Example: set-up
Suppose there are two bidders. Each bidders valuation is distributed
uniformly on interval [5, 7].
By using arguments similar to these for second-price auction, bidding true
valuation is a weakly dominant strategy here (but we will not check it,
because to do so I would have to specify the game more carefully). The
difference is when bidder bid:
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Bid early (e): when a bidder submits the bid, the rival has enough
time to respond to her bid. This would lead to a standard
second-price auction;

Bid late (l): when a bidder submits the bid, the rival has no time to
respond, but your bid will go through only with probability .

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Lecture 18: Auctions: Ebay and Amazon.

Monday, 11 May 2015

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Example: bidders payoffs from bidding early

Suppose bidder 1s valuation is v1 . Expected payoff for bidder 1:
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What is the probability of winning? It is a uniform distribution, so the

probability is v125
How much would the winner pay?
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If bidder 1 wins, bidder 2s bid is somewhere in the range [5, v1 ], with

equal probability. So, expected bid of bidder 2, if bidder 1 wins with
the bid v1 , is v12+5 (for statisticians: this is a conditional expectation
of a uniformly distributed random variable, with the condition that the
realisation of this random variable is less than v1 ).
Hence, bidder 1s expected payoff if she wins is v1 v12+5 = v1 25 (note:
the fact that the number is the same as the probability is a
co-incidence).

Hence, the unconditional payoff of bidder 1 is

payoff is 1.
ECON30010

v1 5 2
.
2

Lecture 18: Auctions: Ebay and Amazon.

If v1 = 7, then the

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Example: bidders payoffs from bidding late

Suppose that both bidders bid late. The expected payoff for bidder 1 is
then:
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With probability 1 , the bid does not go through, so payoff is 0

With probability (1 ), bidder 1s bid does go through, but bidder

2s bid does not go through. The payoff to bidder 1 is v1

With probability 2 , both bids go through and the payoff is on the

2
previous slide: v125

So, the total payoff is

2

(1 ) 0 + (1 ) v1 +

ECON30010

Lecture 18: Auctions: Ebay and Amazon.

v1 5
2

2

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Example: comparing late and early bidding payoffs, (I)

2

u1 (l) = (1 ) 0 + (1 ) v1 +

u1 (e) =

v1 5
2

v1 5
2

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v1 5 2
u1 (l) u1 (e) = (1 ) v1 1 2
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v1 5 2
= (1 ) v1 (1 + )
2
Suppose = 1/3. Then (1 + ) = 4/3 and we can re-write the difference
as u1 (l) u1 (e) = 2/9 v1 (v1 5)2 . It is clearly positive for v1
between 5 and 7.
For > 1/3 the difference is also be positive; that is, for any reasonable
values of , bidders prefer to bid late, hoping ot get the object for free.
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Lecture 18: Auctions: Ebay and Amazon.

Monday, 11 May 2015

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Example: comparing late and early bidding payoffs, (II)

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u1 (l) u1 (e) = (1 ) v1 (1 + )

v1 5
2

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Suppose = 0.1.
I For a bidder with valuation 5, the difference is still positive (indeed, a
bidder with valuation 5 can only win an object if bidders bid late)
I For a bidder with valuation 7, the first term is 0.7, but the second
term is 1.1, so the difference is negative.
So, if = 0.1, bidding late is not an equilibrium: high-valuation bidders
would want to deviate.
Equilibrium in this case is even more interesting: there is a value v, such
that any bidder whose true value is above v bid early and induce a
standard second-price auction. If both bidders valuation is below v, then
they wait until the last second, and submit their bids then.
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Lecture 18: Auctions: Ebay and Amazon.

Monday, 11 May 2015

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Summary
Economics
I Small details in design matter
I

NZ vs. FCC auctions: English-style and sealed-bid style auctions.

Identical in a simple one-unit case, but major differences when applied
to real life;
Ebay and Amazon auctions: the difference is stopping rule may appear
insignificant.

Methodology
I

Note the similarities in the mechanics of calculations in first-price and

in second-price auction: even though we can analyse second-price
auction using weakly dominant strategies, when we need to calculate
payoffs, we do the same things as in the first-price auction;

Yet, note that in the second-price auction we also need to pay

attention to the expectation of the other persons bid, as it
determines the price.
ECON30010

Lecture 18: Auctions: Ebay and Amazon.

Monday, 11 May 2015

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