Shill bidding in multi-round online auctions

Abstract

The online implementation of traditional business mechanisms raises many new issues not considered in classical economic models. This partially explains why online auctions have become the most successful but also the most controversial Internet businesses in recent years. One emerging issue is that the lack of authentication over the Internet has encouraged shill bidding, the deliberate placing of bids on the seller's behalf to artificially drive up the price of the seller's auctioned item. Private-value English auctions with shill bidding can result in a higher expected seller profit than other auction formats (W. Wang et al., 2001), violating the classical revenue equivalence theory. The paper analyzes shill bidding in multi-round online English auctions and proves that there is no equilibrium without shill bidding. Taking into account the seller's shills and relistings, bidders with valuations even higher than the reserve will either wait for the next round or shield their bids in the current round. Hence, it is inevitable to redesign online auctions to deal with the "shiller's curse".