3.1 Hacks #20-32

The term "auction" evokes a vivid image in most people's minds: a fast-talking auctioneer at a podium, dozens of seated participants, and an assistant parading numbered collectibles across the stage, one by one, as the participants place their bids. The auctioneer quotes an opening price, and participants signal their interest by raising their hands, at which point the bid price is raised by some arbitrary amount. Bidding for each item continues until the current bid price exceeds the amount all but one of the participants is willing to pay.

eBay's bidding system works a little differently. For one, auctions are timed, and close at a predetermined date and time, regardless of the bid price or whether or not everyone has finished bidding.

Secondly, eBay uses something called "Proxy Bidding," a system that somewhat compensates for the fact that the auctions are timed. Instead of placing individual bids on an item, you simply specify a single "maximum bid," and eBay does the rest. Imagine sending someone else to an auction for you, giving them a certain amount of money to bid on a single item. That person, the proxy, would place traditional bids until he wins the auction or runs out of money.

Finally, eBay offers "fixed-price" listings, allowing buyers and sellers to skip the bidding process and complete the deal with a single purchase, as though eBay were just another online store. Furthermore, the "Buy-It-Now" feature allows sellers to turn their auctions into a hybrid of sorts, permitting either ordinary bidding or a single purchase. (See [Hack #26] for more information.) Factoid: About 24% of all listings on eBay end with a Buy-It-Now or fixed-price purchase.

3.1.1 Proxy Bidding

The best way to understand proxy bidding is to see it in action.

A seller starts an auction for an antique pocket watch, and sets an opening bid of $25.00. The duration of the auction is five days; since the auction started at 3:52 P.M. on a Thursday, it is scheduled to end at 3:52 P.M. the following Tuesday. Here's how bidding might proceed:

Here, a total of five bidders placed a total of five bids, and the final price ended up at $1.00 more than the second-highest bid. See [Hack #25] for details on the $1.00 increment shown here.

In any auction with more than one bidder, the final value is always in the neighborhood of what at least two bidders are willing to pay for the item.

The problem with proxy bidding is that bidders are human, and as such, the excitement of winning can cloud their judgment. Furthermore, many bidders still think ? and bid ? in conventional terms. The next example paints a somewhat more realistic picture of how bidding works, using the same auction as the previous example.

Two important things happened in this second example. First, a bidding war took place between Bidder 1 and Bidder 2. Between them, they placed seven bids, but neither won the auction. It would've been much less trouble if each had simply decided how much he or she was willing to spend and then stuck to it.

The beauty of proxy bidding is that it also accommodates conventional bidding, allowing bidders to enter a single bid or a maximum bid with equal ease. But true proxy bidding is the better choice, because it enforces the concept of picking a maximum and sticking to it.

Second, Bidder 3 saw this war and decided to stay out of it. Instead, she waited until about three minutes before the end of the auction, and then placed her maximum bid. Since there wasn't enough time for Bidder 1 to be notified that she had been outbid, she never bid higher, and ended up losing the auction. Not only did waiting ensure a win for Bidder 3, it avoided further bidding wars, which ultimately resulted in a lower final price. This is called sniping, and is discussed in [Hack #21].

It's important to point out that sniping doesn't guarantee a win. Quite the contrary, in fact: had either Bidder 1 or Bidder 2 entered a bid higher than $50, either would've won the auction, regardless of Bidder 3's bid. And I'm sure that at least one of the early bidders returned after the auction ended and thought "I would've been willing to pay more than that!"