Shill Bidding Research Articles

Who pays when auction rules are bent?

In many negotiations, rules are soft in the sense that the seller and/or buyers may break them at some cost. When buyers have private values, we show that the cost of such opportunistic behavior (whether by the buyers or the seller) is borne entirely by the seller in equilibrium, in the form of lower revenues. Consequently, the seller is willing to pay an auctioneer to credibly commit to a mechanism in which no one has the ability or the incentive to break the rules. Examples of “costly rule bending” considered here include hiring shill bidders and trying to learn others' bids before making one's own.

STATISTICAL PROPERTIES OF ONLINE AUCTIONS

We characterize the statistical properties of a large number of online auctions run on eBay. Both stationary and dynamic properties, like distributions of prices, number of bids etc., as well as relations between these quantities are studied. The analysis of the data reveals surprisingly simple distributions and relations, typically of power-law form. Based on these findings we introduce a simple method to identify suspicious auctions that could be influenced by a form of fraud known as shill bidding. Furthermore the influence of bidding strategies is discussed. The results indicate that the observed behavior is related to a mixture of agents using a variety of strategies.

The effect of shill bidding upon prices: Experimental evidence

This paper explores, through a series of experiments, the effect of shill bidding upon revenues and prices in auctions. We study the practice of shill bidding in a common value framework. Our findings are consistent with the prediction that, if bidders are aware of the possibility of seller participation in an auction, profits will be reduced on average. We also study factors that affect bidder and seller participation decisions. Shill bidding can alleviate the problem of the winner's curse by lowering the price and it can, thus, provide benefits to bidders.

Who Pays When Auction Rules are Bent?

In many negotiations, rules are soft in the sense that the seller and/or buyers may break them at some cost. When buyers have private values, we show that the cost of such 'rule bending' is borne entirely by the seller in equilibrium. Consequently, the seller is willing to pay an intermediary to credibly commit to a mechanism in which no one has the ability or the incentive to cheat. Examples of costly rule bending considered here include hiring shill (fake) bidders and trying to learn others' bids before making one's own. Buyers may also invest in legitimate bidding software that can give them an advantage over buyers who enter bids manually and thus are slow to respond to changes in other's bids. In equilibrium, the cost of all such socially wasteful investments (whether made by the buyers or the seller) is passed through to the seller in the form of lower revenues.

Collusion in one-shot second-price auctions

Most of the literature on collusive behavior in auctions ignores two important issues that make collusion difficult to sustain at least in one-shot interactions: the detection of cheating and the verification of bids. Colluding bidders may deceive each other by using shill bidders. Also, if the identities of the bidders and their bids are not published then it would be difficult to verify the bid of a colluding bidder. This paper addresses these problems in one shot second price auctions where one bidder offers another bidder a side payment in exchange for not participating in the auction, while the number of other bidders is stochastic. In spite of the barriers to collusion mentioned above, a simple side payment mechanism which depends only on the auction price is introduced. It induces a successful collusion, eliminates the verification problem, provides no incentive for the use of shill bidders and guarantees that the proponent obtains ex-post non-negative payoff. The colluding bidders are ex-ante strictly better off compared with the competitive case, irrespective of their types.

The Effect of Shill Bidding upon Prices: Experimental Evidence

This paper explores, through a series of experiments, the effect of shill bidding upon revenues and prices in auctions. We study the practice of shill bidding in a common value framework. Our findings are consistent with the prediction that, if bidders are aware of the possibility of seller participation in an auction, profits will be reduced on average. We also study factors that affect bidder and seller participation decisions. Shill bidding can alleviate the problem of the winner's curse by lowering the price and it can, thus, provide benefits to bidders.

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

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.

Bidder collusion

We analyze bidder collusion at first-price and second-price auctions. Our focus is on less than all-inclusive cartels and collusive mechanisms that do not rely on auction outcomes. We show that cartels that cannot control the bids of their members can eliminate all ring competition at second-price auctions, but not at first-price auctions. At first-price auctions, when the cartel cannot control members’ bids, cartel behavior involves multiple cartel bids. Cartels that can control bids of their members can suppress all ring competition at both second-price and first-price auctions; however, shill bidding reduces the profitability of collusion at first-price auctions.

COUNTERACTING SHILL BIDDING IN ONLINE ENGLISH AUCTION

The popularity of online auctions and the associated frauds have led to many auction sites preferring English auction over other auction mechanisms. The ease of adopting multiple fake identities over the Internet nourishes shill bidding by fraudulent sellers in English auction. In this paper, we derive an equilibrium bidding strategy to counteract shill bidding in an online English auction. An algorithm based on this strategy is developed. We conduct experiments to evaluate the strategy in a simulated eBay like auction environment. Five popular bidding strategies are compared with the proposed one. In the simulation, bidders compete to buy a product in the presence of a shill. Each bidder is randomly assigned a bidding strategy. She draws her valuation from a uniform distribution. The experiments show hat the average expected utility of agents with proposed strategy is the highest when the auction continues for a longer duration.

SHILL BIDDING IN ONLINE ENGLISH AUCTIONS WITH A RANDOM NUMBER OF BIDDERS

Shill bidding has increased substantially with the explosion in the number of online auctions. For English auctions with conventional intermediation fee schedules and a continuous increment of the bid, sellers may profit from shill bidding, which is illegal. To deter shill bidding, Wang et al.31 designed a mechanism — the shill-deterrent fee schedule (SDFS) which makes shill bidding unprofitable. This paper analyzes the feasibility of applying SDFS rules to both single round and multi-round English auctions in a framework of independent private value (IPV) with a random number of bidders. It is shown that most of the results in Wang et al.31 remain true at our cases. In addition, we also propose an approach for sellers to reset the subsequent reserves in multi-round English auctions.

EBay's Proxy System: A License to Shill

We introduce a bidding strategy which allows the seller to extract the full surplus of the high bidder in eBay auctions. We call this a Discover-and-Stop bidding strategy and estimate that 1.39% of all bids in eBay auctions are placed by sellers (or accomplices) who execute this strategy. We argue that this kind of shill bidding is unnecessarily effective due to eBay's proxy system and the predictability of other bidders' bids. We show that eBay could slightly modify its auction mechanism to reduce the shilling we describe. We also model eBay auctions with shill bidding and find that, in equilibrium, eBay's profits are higher with shilling than without it.

The effects of shilling on final bid prices in online auctions

An increasing number of reports of online auction fraud are of growing concern to auction operators and participants. In this research, we discuss reserve price shilling, where a bidder shills in order to avoid paying auction house fees, rather than to drive up the price of the final bid. We examine the effect that premium bids have upon the final selling price, since they are linked with reserve price shill bids. We use 10,260 eBay auctions during April 2001, and identify 919 auctions involving 322 sellers and 1583 bidders involved in concurrent auctions for the exact same item. We find that premium bidding occurs 23% of the time, in 263 of the 919 auctions. Using a theoretical perspective involving valuation signals, we show that other bidders may view high bids as signals that an item is worth more. Thus, they may be willing to pay more for the items than others that do not receive premium bids. The implications are disturbing in that sellers may be more motivated to enter a shill bid in order to drive up the final price in an online auction. We also examine and report on alternative hypotheses involving winner’s curse and the possibility of reserve price shill bids. Our results are developed in the context of a weighted least squares regression model that predicts an item selling price-to- average selling price ratio.

On cheating in sealed-bid auctions

Motivated by the rise of online auctions and their relative lack of security, this paper analyzes two forms of cheating in sealed-bid auctions. The first type of cheating we consider occurs when the seller examines the bids of a second-price auction before the auction clears and then submits a shill bid in order to increase the payment of the winning bidder. In the second type, a bidder cheats in a first-price auction by examining the competing bids before submitting his own bid. In both cases, we derive equilibrium strategies when bidders are aware of the possibility of cheating. These results provide insights into sealed-bid auctions even in the absence of cheating, including some counterintuitive results on the effects of overbidding in a first-price auction.

Auctions with shill bidding

Shill bidding has increased substantially in recent years since the technology employed to conduct on-line auctions enables many sellers to disguise their identities and bid. Although their intent is to gain by misleading the bidders on the value of the object, we show that in a common value auction sellers are worse off shill bidding. In fact, any out-of-auction mechanism that makes it difficult for them to shill bid increases their revenues. In addition, shill bidding reduces the surplus of the bidders and the surplus from trade. It is only the auctioneer who could gain from this activity and in that sense he may not have an incentive from within the auction to discourage shill bidding.

The Impact of Discrete Bidding and Bidder Aggressiveness on Sellers' Strategies in Open English Auctions: Reserves and Covert Shilling

In practice, the rules in most open English auctions require participants to raise bids by a sizeable, discrete amount. Furthermore, some bidders are typically more aggressive in seeking to become the “current bidder” during competitive bidding. Most auction theory, however, has assumed bidders can place any tiny “continuous” bid increase, and recommend as optimal the tiniest possible increase. This article examines how incorporating discrete bidding and bidder aggressiveness affect optimal strategies for an important decision for auction sellers, which is setting the lowest acceptable bid at which to sell the property. We investigate two alternative methods sellers often use to enforce this decision. These are setting an irrevocable reserve before the auction, and covert shilling, where the seller or confederates pose as bona fide bidders and raise bona fide bids, unsuspected by bidders. These optimal strategies interest auction participants, especially sellers who must recognize the bidding rules and bidder aggressiveness they will encounter in actual auctions. We also examine how these strategies change with the auction context, such as the number of bidders, and how they differ from corresponding strategies already identified for continuous bidding. Our model examines open English auctions where bidders have independent, private valuations. We find that discrete bidding does affect these strategies, as does the aggressiveness of the bidder with the highest valuation, relative to the average aggressiveness of all other remaining bidders. We identify the seller's optimal discrete reserve, and show that if the highest valuator is relatively more (less) aggressive, this increases (decreases) from the optimal continuous reserve, and also increases (decreases) as the number of bidders increases. With continuous bidding, by contrast, this reserve is invariant to the number of bidders. As this bidder becomes relatively more aggressive, for a given number of bidders, the optimal discrete reserve increases, while as he or she becomes less aggressive, the seller's expected auction utility increases, which increases the set of auctions where discrete bidding generates higher seller welfare than continuous. We propose a covert shilling model that requires shilling sellers, and any confederates and auctioneers, to outwardly act no differently than with reserves, to avoid detection. We identify cases where the seller optimally shills once the bona fide bidding has stopped, and identify the corresponding optimal point to stop shilling and accept the next bona fide bid, if offered. This stopping point does not depend on where bona fide bidding stops, or aggressiveness, or the number of bidders, or on whether shill bids alternate with bona fide bids or are consecutively entered. We also find that the optimal lowest acceptable bid with shilling can be higher (lower) than that with reserves if the highest valuator is sufficiently unaggressive (aggressive). By comparison, in continuous bidding shilling and reserves yield identical lowest acceptable bids. Sometimes the seller using a shilling strategy optimally should not shill at all, and instead accept the bid where bona fide bidding stops. This can occur when that bid, or the number of bidders, is sufficiently high, or when the highest valuator is as, or less, aggressive than other bidders. Optimal shilling can be as practical to implement as reserves, because it does not require sellers to have any information beyond that needed in a reserve auction. If sellers shill optimally, they can never be worse off compared to using a reserve, and can be better off. Shilling can make bidders worse off, but can also make them better off when the seller using a shilling strategy optimally accepts bids below the optimal reserve. In these latter cases, shilling Pareto dominates reserves, ex ante. We provide numerical examples to illustrate these results. We discuss how our results might be affected if shilling is not covert, or bidders' valuations have a common value component rather than being independent, or by the rules used in many discrete bid Internet auctions.