Online Auctions: The role of sniping in internet auctions

and the influence of feedback on the final price on eBay

Maastricht University
School of Business & Economics
Place & date: Maastricht, 2.12.2012
Name, initials: Heyner, L.J. For assessor only
ID number: I6052322 1. Content
Study: International Business 2. Language
structure
Course code: 3. Language
accuracy
Group number: 25 4. Language:
Format &
citing/referencing
Tutor name: Fortuna Casoria Overall:
Writing tutor name: Kirsty Donald Advisory grade
Writing Main Paper Assessor’s initials
assignment:
Your UM email address: l.heyner@student.maastrichtuniversity.nl
Table of content:
1. Introduction

2. Sniping

2.1 Advantages and disadvantages of Sniping

2.2 The role of Strategic Interaction in Sniping

3. Ebay’s feedback system

3.1 Influence on the price

4. Conclusion

5. References

6. List of figures
1.) Introduction

With the rise of the E-commerce, auctions have found their way into the World Wide
Web. The most popular internet auction company is “eBay.com”, founded in California in
1995, which provides a platform for users to sell and buy goods via the internet. As it grows
steadily (around 100 million users by 2011, www.ebay.com) it enables the consumers to bid
for an ever-increasing quantity of different items.
On eBay the seller sets a starting price and an ending time. Within this time limit every
registered user can make a bid. The auction style on Ebay is called “proxy bidding”, an
implementation of a Vickrey auction1 with one difference: The winner is the buyer with the
highest bid but pays the price of the second-highest bid instead of the winning bid. Ebay itself
acts as an intermediary between the two parties.
Winner and final price level depend on the bidding behaviour and experience of both sellers
and buyers.

This paper deals with two subjects that have an influence on the outcome of every auction:
Firstly, there is “sniping”, a buyer’s strategy in which a buyer places a maximum bid a few
seconds before the auction ends. Reasons why buyers use this strategy as well as its
advantages are to be examined. Section 2.2 investigates the role of strategic interaction in
“bidding wars“ and gives an example in the form of a game theory application illustrating the
outcome of the sniping strategy.
Secondly, the paper analyses the importance of the feedback a seller receives from a buyer
after an item has been sold. Negative or positive feedback makes up the reputation of a seller
and is supposed to prevent users from fraud. Furthermore it has an influence on the price.
Finally a conclusion is given.

2.) Sniping

Sniping or “Last-Minute-Bidding” is a buyer’s strategy in online auctions. If applied

well, it provides the potential buyer with a larger economic surplus - in other words a lower
price to pay than one’s reservation price (maximum bid) – than bidding in the incrementing
way which is quite common among inexperienced users.

1
A Vickrey Auction is a sealed-bid auction, where bidders place maximum bids without knowing the bids of
other people in the auction. The highest bid wins but the second-highest price is to be paid.
 2.1 Advantages and Disadvantages of Sniping

Instead of placing bids continuously, thus getting into “price wars” or “bidding wars”,
which raises the price with opposing bidders (A.Roth & A. Ockenfels, 2002), buyers set a
reservation price (called proxy bid, a feature that automatically keeps outbidding others’ bids
until one’s own reservation price has been reached) in the last seconds of an auction in order
to avoid high prices. By submitting a maximum bid right before the end a “sniper” does not
leave enough time for competing users to respond with an even higher maximum bid. Thus, a
sniper tries to keep the price low up to the very end of time to purchase the desired item at the
lowest price possible. Since online auctions on eBay have a fixed ending time sniping seems
to be a simple strategy to get higher chances of winning an item at a much lower price.

One of the reasons for the efficiency of last-minute bidding is the ignorance of most of
eBay’s new users. New bidders are just not familiar with the proxy bidding system existing on
eBay. In order to remain highest bidder, these “normal” users keep placing bids as soon as
they get outbidded, which normally ends up in a “bidding war” that increases the actual price
significantly. As Roth and Ockenfels (2002) stated, inexperienced online bidders follow that
pattern because they believe this process is the same as a First-Price “English” auction in the
way it works in the real world.
Furthermore sniping avoids being a victim of dishonest sellers that use shill bidders, i.e. the
seller himself or someone acting on his behalf placing bids continuously via another account,
in order to raise the final which means selling the item at a higher price.
Other online auction companies, like Amazon.com for instance, avoid the sniping
phenomenon by extending the time limit by a couple of minutes when bid is submitted during
the last minute of an auction (H. Wenyan & A. Bolivar, 2008).

2.2 The role of Strategic Interactions in Sniping

3.) Ebay’s feedback system

3.1 Influence on the price
4.) Conclusion
It has become obvious that applying the sniping strategy has two significant
advantages at a time. Most likely, snipers have a better chance of winning an auction or a
desired item at a lower price. These two factors help provide a maximum economic surplus.

Bibliography

5.) References:

Roth, A.E. & ockenfels, A, (2002). Last-Minute Bidding and the Rules for Ending Second-
Price Auctions: Evidence from eBay and Amazon Auctions on the Internet. The American
Economic Review, 92,4: 1093-1103

Wenyan, H. & Bolivar, A. (2008) Online Auctions Efficiency: A Survey of eBay Industrial
Practice and Experience

6.) List of Figures

Links:
http://voices.yahoo.com/applying-game-theory-win-ebay-auctions-774095.html?cat=9
http://www.beyonddiscovery.org/content/view.page.asp?I=3685
http://en.wikipedia.org/wiki/Auction_sniping