Last minute only bidding is implausible in eBay sealed bid type-of-auctions

Abstract

In recent years internet auctions have attracted much attention. This paper discusses the "last minute bidding" (sniping) phenomenon, first investigated by Roth and Ockenfels (American Economic Review 92, 1093-1103) in eBay, fixed-end, auctions. Unlike standard auctions where each offer is processed by the auctioneer due to system traffic, and connection time, in eBay auctions very late bids may be left unprocessed. In the paper we consider a simple two-players, two-periods sealed-bid auction model, inspired by eBay auctions, with private values and complete information. The main difference with respect to e-Bay auctions is given by the first period. Indeed, players can submit at most one bid per period. In the first stage bids are processed with certainty by the system while in the second stage, with positive probability, bids may not be processed due to system congestion. Unlike eBay we show how in this model last minute, that is second stage only, bidding may have low plausibility, as it can be a Nash equilibrium only under very specific circumstances and is never a unique best reply. Intuitively this is because the first stage is sealed-bid, with at most one offer per bidder, and players have no guarantee that they could outbid the opponent in the second period, once after the first round they realise that their bid is not the best.