Cheating in online auction – Towards explaining the popularity of English auction

Abstract

Action frauds constitute largest part of all Internet frauds. Cheating is a kind of fraud that does not have direct evidences of its occurrence. We conduct theoretical studies as well as simulation experiments to find out the effect of cheating in three important types of auctions: English auction, first-price sealed-bid, and second-price sealed-bid auction. Our cheating environment consists of shill bidding, bid shading and false bidding in English, first-price and second-price auction, respectively. In the experiments ordinary bidders, bidders with the equilibrium bidding strategy, and cheaters compete with each other. Both theoretical and experimental results confirm that the equilibrium bidding strategies indeed increases the bidders’ expected utility. Therefore, it can be concluded that adoption of rational bidding strategies can combat cheating. It is found that most of the auction sites intuitively prefer English auction to other auction mechanisms. There is not much theoretical or experimental evidence to support such an intuition. We use honest bidder’s expected gain and honest seller’s revenue loss as a basis to compare these three important auctions types. The analysis of the results reveals English auction to be the most preferred mechanism from both honest buyer’s and honest seller’s point of view. This result can be used as an experimental evidence to explain the popularity of English auction over the Internet.