Gradual bidding in ebay-like auctions

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This paper shows that in online auctions like ebay, if bidders are not continuously participating in the auction but can only place bids at random times, then many different equilibria arise besides truthful bidding, despite the option to leave proxy bids. These equilibria can involve gradual bidding, periods of inactivity, and waiting to start bidding towards the end of the auction - bidding behaviors common on ebay. For symmetric bidders in a complete information setting, we characterize a class of equilibria that include the best and worst Markovian equilibria for the seller. In specific cases we also identify the worst non-Markovian equilibrium for the seller. The revenue of the seller in these equilibria can be a small fraction of what could be obtained at a sealed-bid second-price auction, and it can paradoxically decrease in the value of the object for the buyers. We show that the existence of equilibria with similar features extends to settings with asymmetric bidders, time-dependent arrival rates, and asymmetric information.


revision requested by the American Economic Review

Last updated on 12/04/2012