Wednesday, April 18, 2012

Online Auction Strategy

Let's talk eBay strategy! How do you win an eBay (or similar) auction?

I bring this up because the auction I won over the weekend was like an eBay auction, although hosted on different website. The auction closed at a fixed time, bids could be submitted anytime prior to then, and the person with highest bid at closing time wins the item. It also allowed for "proxy bids", where if someone else bids, the system will automatically and immediately outbid the other guy for you, up to your "maximum value". Assuming that everyone proxy bids, then the winning bid will effectively end up being one minimum bid increment (in the case of this auction, $10) higher than the second highest bid, rather than the full amount the highest bidder was willing to spend (this is called a "second-price auction").

I've had very little experience with eBay over the years. I find participating in an online auction mentally exhausting and, since I almost never win, frustrating. I usually just "Buy It Now" and save myself the trouble, even if that means spending more in the end. (Time is money, right?) And when I do bid on items, I almost always get outbid at the very end. So, am I doing it wrong? To find out, I thought I'd do a little research regarding the best way to win an online auction.

Well, it's pretty simple, really. Why do people wait until the very end to place their bid? Because it works! This is called "sniping", and it's the most effective way to win an auction at the lowest possible price, even in the presence of automatic proxy bidding. The reason is psychology: people usually underestimate the true maximum amount they are willing to spend on an item, making proxy bids that are lower than the bidders' true maximum values. This gives the competition an opportunity to "snipe" the bid just before the auction ends and not only win, but win at a lower price, because the other guy didn't have a chance to react and counter with whatever his/her actual maximum value may have been.

Let's say there's an item out there somewhere for auction, and you think, "I'd be willing to spend $150 on that". So, you place a proxy bid for $150. With five minutes remaining, your bid is still the highest bid. But then, with two minutes left, someone outbids you with a bid of $155. Now...you previously said that you wouldn't be willing to spend more than $150. But would you be willing to spend $160 if it meant winning the item? I mean, it's just $10 more! It's hard to say no to that in the heat of the moment. With that in mind, was $150 really your maximum value?

Another argument for sniping: if you want the selling price to remain low, then it makes sense to keep the highest bid as low as possible for as long as possible, right?

Another tactic I read somewhere, which I'm not sure if I buy, is "nibbling" - placing a bunch of minimum bets early in an auction. If two or more people cooperatively "nibble", then it makes it look like the item is in high demand, which apparently discourages other potential buyers from getting into the fray, and ultimately results in a final sale at less than market value. Again, I don't know how true this is in practice, but the theory makes sense, anyway. Most of the studies I read - yes, a lot of articles on this topic have appeared in reputable mathematical journals - focused more on sniping than nibbling. This is also harder to prove because the theory behind it is more psychological than mathematical. (You know...I should have taken a class in Game Theory when I was in college. I think it would have been really interesting.)

As for the auction this past weekend...well, I totally overthought it. It turns out that I would have likely won regardless of when I placed my maximum value bid. But you can't take that chance, right? You never know how many other people out there in internet land are looking at the same auction you are, planning to swoop in at the last minute for the win. In the end, there were no other last minute snipers, so it didn't really matter. But I didn't know that going in, of course. I really thought there would be more interest than there was.

(And I should clarify...when I say "last minute", I only mean that figuratively; I placed my second and final bid with about five minutes remaining. It makes me a little too nervous to wait until THE last minute. Sure, it's highly unlikely that your internet connection will go down at that very moment, but I figured there was little to be gained by taking that chance.)

Of course...this isn't to say that the only way to win an online auction is wait until the last minute to bid. What if you have, you know, a life? Well, you can still place a max value proxy bid (your real maximum value, not what you originally think it is) with several hours or even days to go and hope for the best. Then, the only way you lose the auction is if someone else is willing to spend more than you are, and if that's the case, so be it. But bidding early does two things:
1) It gives others a chance to consider going above their perceived maximum value, decreasing your chances of winning.
2) Even if you do win, the competition may have raised their bets in response to your bet, resulting in a higher sale price than if you had "sniped".
So, it's not ideal to bid early, but if that's what you have to do, then that's what you have to do. It's kind of annoying that this is what online auctions have come to, but that's the way it is.

So, in general, the keys to winning a eBay (or similar) auction appear to be...
1) Figure out what your "maximum value" is. Sure, you may think you would be willing to spend $100 and nothing more. But if the item can be had for $105, would you do it? It's just $5 more! How much higher are you willing to go, really? At what point would buyer's remorse kick in?
2) Wait until the auction is almost over. In the meantime, go outside. Watch TV. Something.. Don't even think about the auction. There is no benefit to checking the status of the auction every single hour all day long. (Not that that's what I did or anything...)
3) With a few minutes to go - or less - submit a proxy bid for your absolute maximum value.
4) If you win, great! If not, then someone else wanted it more. And that's a better outcome than for you to overpay for something.

(Sources: one, two, three, plus countless other articles and studies that all come to pretty much the same conclusion.)

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