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Shill Bidding in English Auctions

By Wenli Wang, Zoltán Hidvégi and Andrew B. Whinston


Shill bidding in English auction is the deliberate placing bids on the seller’s behalf to artificially drive up the price of his auctioned item. Shill bidding has been known to occur in auctions of high-value items like art and antiques where bidders ’ valuations differ and the seller’s payoff from fraud is high. We prove that privatevalue English auctions with shill bidding can result in a higher expected seller profit than first and second price sealed-bid auctions. To deter shill bidding, we introduce a mechanism which makes shill bidding unprofitable. The mechanism emphasizes the role of an auctioneer who charges the seller a commission fee based on the difference between the winning bid and the seller’s reserve. Commission rates vary from market to market and are mathematically determined to guarantee the non-profitability of shill bidding. We demonstrate through examples how this mechanism works and analyze the seller’s optimal strategy. The Internet provides auctions accessible to the general public. Anyone can easily participate in online auctions, either as a seller or a buyer, and the value of items sold ranges from a few dollars to millions. To respond to this demand, online auction houses have sprung up, supported by the revenue model of charging sellers listing and commission fees. Compared to physica

Year: 2009
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