Via kottke, Clusterflock gives five simple rules for effective bidding on eBay:

Step One:Find the product you want.

Step Two:

Save the product to your watch list.

Step Three:

Wait.

Step Four:

Just before the item ends, enter the maximum amount you are willing to pay for the item.

Step Five:

Click submit.

This is called sniping.  That’s a pejorative label for what is actually a sensible and perfectly straightforward way to bid.  eBay is essentially an open second-price auction and sniping is a way to submit a “sealed” bid.  It’s a popular strategy and advocated by many eBay “experts.”  But does it really pay off?

Tanjim Hossain and I did an experiment (ungated version.)  We compared sniping to another straightforward strategy we call squatting. As the name suggests, squatting means bidding your value on an object at the very first opportunity, essentially staking a claim on that object.  We bid on DVDs and randomly divided auctions into two groups, sniping on the auctions in the first group and squatting on the other.

The two strategies were almost indistinguishable in terms of their payoff.  But for an interesting reason.  A lot of eBay bidders use a strategy of incremental bidding.  That’s where you act as if you are involved in an ascending auction (like an English auction) and you bid the minimum amount needed to become the high biddder.  Once you are the high bidder you stop there and wait to see if you are outbid, then you raise your bid again.  You do this until either you win or the price goes above the maximum amount you are willing to pay.

Against incremental bidders, sniping has a benefit and a cost (relative to squatting.)  You benefit when incremental bidders stop at a price below their value.  You swoop in at the end, the incremental bidders have no time to respond, and you win at the low price.

The cost has to do with competition across auctions for similar objects.  If I squat on auction A and you are sniping in auction B, our opponents think there is one fewer competitor in auction B and more opponents enter auction B than A.  This tends to raise the price in your auction relative to mine.  In other words, squatting scares opponents away, sniping does not.

We found that these two effects almost exactly canceled each other out for auctions of DVDs.  We expect that this would be true for similar objects that are homogeneous and sold in many simultaneous auctions.  So the next time you are bidding in such an auction, don’t think too hard and just bid your value.

Now, I am still trying to figure out what I am going to do with all these copies of 50 First Dates we won in the experiment.

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