eThesis - Kauppakorkeakoulun sähköiset gradut

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In this paper I study the equilibrium bidding strategies in open-ascending Internet auctions. Having approximately 20 years of history, Internet auctions are no longer new to anyone. In spite of that, I dedicate some time to presenting the most significant characteristics that differentiate Internet auctions from their offline counterparts. This will add some valuable insight in analyzing the empirical evidence of the observed bidding behavior in completed auctions.

This thesis aims at finding strategic reasoning for the common practice of last-minute bidding, i.e. sniping, in online auctions. Open-ascending Internet auctions with proxy bidding mechanism have been generally viewed as close equivalents to second-price sealed-bid auctions due to the property that the payoff of the winning bidder i is not directly affected by bidder i's own bid amount. Further, during the course of the auction the highest prevailing proxy bid is never explicitly revealed in the bidding history. Given these properties, we would not expect as significant concentration of bids near the end of the auction as we find in the empirical studies.

The focus of this thesis is on the results derived in the independent private values model with proxy bidding. In this model, assuming a single-item framework the symmetric equilibrium - where every bidder uses the same strategy - has bidders bidding early and up to their reservation prices. We find some empirical evidence supporting this equilibrium: experienced bidders tend to bid either near the beginning or near the end of an auction.

Standard independent private values model alone is not able to sufficiently explain last-minute bidding. Therefore, in order to better capture the essential features of Internet auctions we discuss the following value models as well: repeated auctions, interdependent auctions and common value auctions. These models introduce uncertainty into bidder i's value formation: bidding decisions can be affected e.g. by sequential auctions offering similar items, or there may be liquid resale markets for the auctioned item.

In practice, not all the bidders seem to follow any rational bidding strategy. Some may derive utility not only from the acquisition of the item but also from the competitive aspect of bidding. The effects of the existence of such bidders on the optimal bidding strategies are to be briefly discussed.