Jump Bidding Strategies in Internet Auctions

Abstract

Abidding strategy commonly observed in Internet auctions is that of “jump bidding,” or entering a bid larger than what is necessary to be a currently winning bidder. In this paper, we argue that the cost associated with entering online bids and the uncertainty about future entry—both of which distinguish Internet from live auctions—can explain this behavior. We present a simple theoretical model that includes the preceding characteristics, and derive the conditions under which jump bidding arises in a format commonly used for online trading, the ascending-price auction. We also present evidence, recorded from hundreds of Internet auctions, that is consistent with some of the basic predictions from our model. We find that jump bidding is more likely earlier in an auction, when jumping has a larger strategic value, and that the incentives to jump bid increase as competition increases. Our results also indicate that jump bidding is effective: Jump bidders place fewer bids overall, and increased early jump bidding deters entry later in the auction. We also discuss possible means of reducing bidding costs and evidence that Internet auctioneers are pursuing this goal.

Why Do Sellers (Usually) Prefer Auctions?

“…That is, the bidder with value v* is indifferent between making a deterring bid and deviating to a strategy of never jump bidding but always bidding the lowest price possible to beat any challenger until entry closes, or until the price exceeds v*. 22 Summarizing (see Appendix for the details of the proof, and for some simple examples):…”

“…We therefore discuss this possibility in section VII. 22 If a bidder with value v* is just indifferent about deviating, a bidder with a lower (higher) value would strictly gain (lose) by deviating, since higher-value types prefer strategies with higher probabilities of winning (and deviating strictly reduces the bidder's probability of winning). Not deviating therefore signals a value ≥ v* and so successfully deters entry if v* ≥ V S .…”

Cyber-Shilling in Automobile Auctions: Evidence from a Field Experiment

“…Other models of jump bidding, primarily in the independent private values setting, include Daniel and Hirschleifer (1998); Easley and Tenorio (2004);Hoerner and Sahuguet (2007); and Isaac, Salmon, and Zillante (2007).…”

Predicting Bidders' Willingness to Pay in Online Multiunit Ascending Auctions: Analytical and Empirical Insights

“…Bidders are not bound to bid strictly following the bid increment. As noted by Easley and Tenorio (2004), jump bidding is often observed in Yankee auctions. Auction sites usually specify an auction closing time; however, some auctions sites extend the auction duration if bidding activity is observed in the last few minutes of the auction.…”