eBay’s proxy bidding: A license to shill

We introduce a bidding strategy which allows the seller to extract the full surplus of the high bidder in eBay auctions. We call this a “Discover-and-Stop” bidding strategy and estimate that 1.39 percent of all bids in eBay auctions are placed by sellers (or accomplices) who execute this strategy. We argue that this kind of shill bidding is unnecessarily effective due to eBay’s proxy system and the predictability of other bidders’ bids. We also model eBay auctions with shill bidding and find that, in equilibrium, eBay’s profits are higher with shilling than without it. Finally, to determine whether bidders have an incentive to bid on their own items, we mimic the bidding behavior of shill bidders in actual eBay auctions and find some evidence of the strategy’s success.