eBay combines a proxy bidding system with minimum bid increments.  These interact in a peculiar way.  If you have placed the first bid of $5 and the seller’s reserve is $1, then the initial bid is recorded at $1.  Your true bid of $5 is kept secret and the system will bid for you (by “proxy”) until someone raises the price above $5.

Now I come along and bid, say $2.  That’s not enough to outbid your $5, so you remain the high-bidder but the price is raised.  In this case it is raised to $2 plus the minimum increment, say $0.50, provided that sum is less than your bid.  In this case it is.  But suppose the next bidder comes along and bids $4.75.  Again you have not been outbid and so you remain the high bidder but in this case $4.75 + $0.50 is larger than $5, and when this happens the price is raised only to equal your bid, $5.

So, if you are bidding and your bid was not high enough to displace the high bidder but the price didn’t rise by the minimum increment above your bid, then the new price is exactly the (previously secret) bid of the high bidder.  If you happen to also be the person selling the object up for sale and you are shill bidding, now is the time to stop because you have just raised the price to extract all of the surplus of the high bidder.

Notice how, as a shill bidder, you can incrementally bid the price up and, in most cases, hit but never overshoot the high bid.  (“In most cases” because you must outbid the current price by the minimum increment and you get unlucky if the high bid falls in that gap.  A good guess is that the high bidder is bidding in dollar denominations.  If that is the case you can guarantee a perfect shill.)

This is discussed in a paper by Joseph Engelberg and Jared Williams (Kellogg PhDs.)  The authors have a simple way to detect sellers who using shills in this way and they estimate that at least 1.3% of all bids are shill bids.

Homburg hail:  barker.

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