=Paper=
{{Paper
|id=Vol-223/paper-23
|storemode=property
|title=Sellers Competing for Buyers in Online Markets: Reserve Prices, Shill Bids, and Auction Fees
|pdfUrl=https://ceur-ws.org/Vol-223/27.pdf
|volume=Vol-223
|authors=Enrico Gerding (University of Southampton),Alex Rogers (University of Southampton),Rajdeep Dash (University of Southampton),Nicholas Jennings (University of Southampton)
|dblpUrl=https://dblp.org/rec/conf/eumas/GerdingRDJ06
}}
==Sellers Competing for Buyers in Online Markets: Reserve Prices, Shill Bids, and Auction Fees==
https://ceur-ws.org/Vol-223/27.pdf
Sellers Competing for Buyers in Online Markets:
Reserve Prices, Shill Bids, and Auction Fees∗
Enrico H. Gerding Alex Rogers Rajdeep K. Dash
Nicholas R. Jennings
University of Southampton, Southampton, SO17 1BJ, UK.
{eg,acr,rkd,nrj}@ecs.soton.ac.uk
[Extended Abstract]
Online markets are becoming increasingly prevalent and extend to a wide variety of areas such as
e-commerce, Grid computing, recommender systems, and sensor networks. To date, much of the
existing research has focused on the design and operation of individual auctions or exchanges for
allocating goods and services. In practice, however, similar items are typically offered by multiple
independent sellers that compete for buyers and set their own terms and conditions (such as their
reserve price and the type and duration of the auction) within an institution that mediates between
buyers and sellers. Examples of such institutions include eBay, Amazon and Yahoo!, where at any
point in time multiple concurrent auctions with different settings are selling similar objects, resulting
in strong competition1 .
Given this competition, a key research question is how a seller should select their auction settings
in order to best attract buyers and so increase their expected profits. In this paper, we consider
this issue in terms of setting the seller’s reserve price (since the role of the reserve price has received
attention in both single isolated auctions and also in cases where sellers compete). In particular,
we extend the existing analysis by considering how sellers may improve their profit by shill bidding
(i.e., bidding within their own auction as a means of setting an implicit reserve price). We do so
analytically in the case of two sellers, and then develop an evolutionary simulation to enable us
to solve the general case of multiple sellers. Moreover, since shill bidding is generally undesirable
(it undermines trust in the institution and decreases overall market efficiency), we then extend our
evolutionary simulation to investigate how the institution can deter shill bidding through the use
of appropriate auction fees.
In more detail, existing literature on competing sellers (e.g., see [1, 3, 5]) has shown that setting
a reserve price has two opposing effects on the sellers’ profits: on the one hand, a reserve price
can increase a seller’s expected profit since it guarantees a minimum price in case the item is sold.
On the other hand, a reserve price deters potential buyers from participating, and thus the seller’s
expected profits decline. Now, in order to overcome the disadvantage of deterring buyers by setting
a reserve price, a possible strategy for a seller is to shill or shill bid. Thus, the seller still attracts
bidders to the auction by announcing a low reserve price, but submits a shill bid to protect their
profit and ensure that they do not sell the item at too low a price. Shill bidding undermines a buyer’s
trust in the auction and can also have an adverse effect on market efficiency, since setting a reserve
price allows the bidders to make informed decisions of which auction to attend. Although illegal
in many countries, shill bidding is one of the most common forms of Internet auction fraud [4, 6].
Moreover, it is often hard to detect, especially in on-line auctions, where participants are relatively
anonymous. Therefore, rather than punishing shill bidding directly, an institution can reduce the
incentive to shill bid, and, at the same time, improve market efficiency, by introducing appropriate
auction fees [6]. These are payments made by the seller to the institution for its services as a
mediator.
∗ The complete version of this paper is published as [2].
1 To illustrate the scale of this competition, within eBay alone close to a thousand auctions for selling Apple’s
iPod nano were running worldwide at the time of writing.
In the full paper (see [2]), we investigate the above issues and in so doing, make the following
contributions:
• We analytically describe the seller’s equilibrium strategies for setting reserve prices for the
two-seller case, and we advance the current state-of-the-art by finding Nash equilibria by
iteratively discretising the search space. We show that, although no pure strategies exist
when the sellers are symmetric, these can be found if production costs differ sufficiently
between the two sellers.
• For the first time, we investigate shill bidding within a setting of competing sellers. To this
end, we derive analytical expressions for the seller’s expected utility when sellers shill bid.
Using these expressions, we show that, without auction fees, a seller can considerably benefit
by shill bidding when faced with competition.
• We introduce an evolutionary simulation technique that allows us to extend the analytical
approach described above to the general case where an arbitrary number of sellers compete,
and we benchmark this approach against our analytical results.
• Finally, we extend our evolutionary simulation, and use it to compare various types of auction
fees. We evaluate the ability of different fees to deter shill bidding and quantify their impact
on market efficiency. We show the novel results that within a market with competing sellers,
auction fees based on the difference between the payment and the reserve price are more
effective than the more commonly used auction fees with regards to deterring shill bidding
and increasing market efficiency.
References
[1] R. Burguet and J. Sákovics. Imperfect competition in auction design. International Economic
Review, 40(1):231–247, 1999.
[2] E. H. Gerding, A. Rogers, R. K. Dash, and N. R. Jennings. Sellers competing for buyers in online
markets: Reserve prices, shill bids, and auction fees. In Proceedings of the 20th International
Joint Conference on Artificial Intelligence, Hyderabad, India, 2007.
[3] Á. Hernando-Veciana. Competition among auctioneers in large markets. Journal of Economic
Theory, 121:107–127, 2005.
[4] R.J. Kauffman and C.A. Wood. The effects of shilling on final bid prices in online auctions.
Electronic Commerce Research and Applications, 4:21–34, 2005.
[5] R. Preston McAfee. Mechanism design by competing sellers. Econometrica, 61(6):1281–1312,
1993.
[6] W. Wang, Z. Hidvégi, and A.B. Whinston. Shill-proof fee (SPF) schedule: The sunscreen
against seller self-collusion in online english auctions. Working Paper, 2004.