Why eBay Bidders Are Smarter than You Might Think

Robert Zeithammer believes he has found a way to analyze theoretically and prove empirically what seems intuitively true about eBay bidding: people bid less on an item when they know they will have the opportunity to buy it again in future auctions.

Research by Zeithammer, assistant professor of marketing, indicates that the greater the chances of getting the same product tomorrow but possibly at a lower price, the lower bids are today. The findings are detailed in the paper “Forward-Looking Bidding in Online Auctions” published in the August 2006 issue of Journal of Marketing Research.

“The first thing you notice about the situation you’re facing as an e-Bay buyer is that these are not simultaneous auctions,” he said. “One ends before the other ends. As long as you start bidding on the one that ends first, you will always have the opportunity to change your mind later on the other ones. If you lose, you get to continue since the later auctions will still be available. If you win, however, you’re done.”

Zeithammer said that given the same number of bidders in each auction on the same item, they will “shade” their bids 5 to 10 percent when the product is available in the near future, referring to the tendency for people to decrease a bid below what they would bid on an isolated unit of the product. It seems that e-Bay bidders know about the future opportunities to buy the same product and take this information into account when forming bids, Zeithammer said. “In general the conclusion of this whole research is that e-Bay bidders are pretty smart. An alternate hypothesis might be that people do not realize there are other auctions on the same item, but the study shows that that’s not true.”

Such an analysis can be applied to sequential procurement bidding like contracts as highway construction, where the lowest bidder wins the job. If a company with capacity constraints wins a large contract, Zeithammer said, it will not be able to do other work during the project. “You shade up in procurement, way above cost,” he said. “There is evidence from other data sets that shading is going on in the contractor market in California.”

Read the paper “Forward-Looking Bidding in Online Auctions.”

—Phil Rockrohr