The Shill Bidding Effect versus the Linkage Principle

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Abstract

The analysis of second price auctions with externalities is utterly modified if the seller is unable to commit not to participate in the mechanism. For the General Symmetric Model introduced by Milgrom and Weber [P. Milgrom, R. Weber, A theory of auctions and competitive bidding, Econometrica 50 (1982) 1089–1122] we characterize the full set of separating equilibria that are symmetric among buyers and with a strategic seller being able to bid in the same way as any buyer through a so-called shill bidding activity. The revenue ranking between first and second price auctions is different from the one arising in Milgrom and Weber: the benefits from the highlighted ‘Linkage Principle’ are counterbalanced by the ‘Shill Bidding Effect.’

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  • Cited by (18)

    • Shill bidding and information in eBay auctions: A Laboratory study

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      Even though shill bidding raises the buyers’ bids, the authors show that sellers are better off if there exists an institution that credibly prevents shill bidding since buyers lower their bids when they expect shill bidding. In line with this result, Lamy (2009) shows that shill bidding is harmful to sellers in second price auctions when buyers have affiliated values and signals are independent. Finally, both Bose and Daripa (2017) and Barbaro and Bracht (2021) show that buyers snipe in equilibrium as a response to shill bidding in the eBay auction.

    • Shill bidding and trust

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      Bose and Daripa (2017) present a theoretical model where late-bidding counteracts shill bidding when bids provide the seller with information about the distribution of values. The robustness of the Linkage Principle of information revelation with shill bidding is explored theoretically by Lamy (2009). While the informational effect of shill bidding explored in these previous works is an interesting issue, we reduce the environment to a simpler one.

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      2017, Games and Economic Behavior
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      In such contexts, our work can be seen as a benchmark model with rational bidders. Chakraborty and Kosmopoulou (2004), Lamy (2009) examine shill bidding in environments with common or interdependent values, and show that the presence of shill bidding can reduce the information content of the observed auction prices, and reduce the seller's revenue. Kosmopoulou and De Silva (2007) provide experimental evidence of this phenomenon.

    • Optimal bidding in auctions from a game theory perspective

      2016, European Journal of Operational Research
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      As a result, shilling reduces the seller's expected revenue. Lamy (2009) considered a symmetric affiliated value FPA or SPA, where the seller, after setting a fixed reserve price, decides whether to submit a shill bid, acting strategically as a new uninformed bidder. The symmetric equilibrium strategies for the bidders and the seller yield lower revenue for the seller when shilling is possible, because sellers bid less aggressively due to the fear that the second highest bid will come from the seller.

    • Shill bidding: Empirical evidence of its effectiveness and likelihood of detection in online auction systems

      2015, International Journal of Accounting Information Systems
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      Since all major websites prevent access to the data, research about shill bidding is sparse and results are often conflicting. For example, some analytical studies find that the potential for shill bidding reduces prices, thereby decreasing profits to sellers (for example, Chakraborty and Kosmopoulou, 2004) while others find that sellers can increase their profits by shill bidding (for example, Graham et al., 1990; Lamy, 2009). Further, some researchers believe that bidders who bid quickly after being outbid might be shill bidders (for example, Ford et al., 2010) while others indicate that an equally plausible explanation may be the so-called “hot-headed” bidder (Hlasny, 2006).

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