I raised this question in my Law & Internet seminar, and the consensus was that AuctionSniper should be legal. Oddly, the fact that more of my students are eBay buyers than sellers did not—they assured me—influence their analysis. I’m still chewing on the problem.
AuctionSniper (ASN) is a website that, for a minimal fee, will bid for you during the last few seconds of an eBay auction. By bidding in the last few seconds, ASN prevents any other bidder from outbidding you, keeping the final auction price lower than it otherwise might be. Because eBay derives profit from higher auction prices, ASN strips eBay of return on investment. ASN facilitates imperfect information in the marketplace: it prevents normal bidders from knowing the maximum bid of an ASN bidder, such that if the normal bidder did know that information, the normal bidder might outbid the ASN bidder and thereby provide eBay greater economic benefit. The question arises, then, whether government should curb ASN’s interference with market information.
At first glance it would seem that government intervention is uncalled for. ASN does nothing more than that which eBay buyers can already do themselves. eBay allows its participants to bid at any time—including the last few seconds of the auction—so ASN plays by the rules that eBay set up. Or perhaps not. Although eBay bidders could potentially perform the last-second bidding themselves, the transaction cost of doing so is usually prohibitively high. Bidders simply don’t want to come back in three days, four hours, fifty-four minutes, and ten seconds to place their final bid. Therefore, eBay’s economic model allows for imperfect information only if the bidder is willing to pay a relatively high transaction cost. ASN decreases that transaction cost to a nominal fee, interfering with eBay’s economic model.
Yet eBay could prevent ASN from engaging in this conduct by employing a simple visual-verification tool. Merely by requiring bidders to enter the letters that they see on their screen could eBay prevent ASN’s automated bidding. Indeed, the fact that eBay has not implemented a visual-identification tool suggests that eBay views ASN as expanding the pool of bidders: the greater pool of bidders that ASN offers apparently outweighs any loss that eBay suffers from ASN’s reduction of bidding prices.
That being said, eBay is not the only market participant who may be harmed by ASN’s conduct. Consider eBay sellers. Although the interests of eBay sellers may align with the interests of eBay, sellers may not agree that ASN provides a net benefit by increasing the pool of bidders. Or consider normal bidders who choose not to use ASN. Normal bidders often derive utility from simply playing the bidding game. For many, bidding against others over a time period is what makes eBay so enjoyable. Rather than buy something at Wal-Mart, you buy it on eBay because it’s fun to play the bidding game. ASN deprives the public of the inherent utility of playing that game, so ASN essentially steals from the public commons.
At the end of the day, however, I’m not sure that this public commons argument persuades me. It seems heavy handed to squash such a creative website as ASN. Or perhaps I'm more like my students than I realized—I do buy more than I sell.
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1. Posted by Michael A. Cleverly on September 10, 2008 @ 10:53 | Permalink
In 2000 (for a now former employer) I helped build a a niche auction site.
To avoid the problem of last minute bid snipping we simply instituted a rule that bidding would not close until the original deadline OR ten minutes had passed since the last bid, whichever was greater.
It seems that eBay could ameliorate the "problem" ASN creates in a similar fashion if they chose to.
2. Posted by Jed Sorokin-Altmann on September 10, 2008 @ 11:00 | Permalink
If eBay wanted to bar wbesites like ASN, they have one of two options. The first is to implement something like what Michael Clevery describes in the first comment. The second is to explcitly bar such things in its TOS, and then go after ASN with the Computer Fraud and Abuse Act.
3. Posted by Ned Snow on September 10, 2008 @ 11:14 | Permalink
I agree, Michael and Jed. eBay has the means to stop the conduct, but it does not, implicitly suggesting that eBay approves of the conduct. Yet should the transaction cost of stopping that conduct lie with eBay? And even if eBay is ok with it, what about innocent third parties who gain from timed bidding (sellers and normal bidders)? Should the law step in to prevent ASN from stealing from the public commons? Perhaps not, simply because eBay should be able to control its own website. On the other hand, eBay has never expressly endorsed the conduct, so arguably government intervention would not contravene eBay's control over its own website. I probably lean toward letting the market take care of it--but there seems reason to pause.
4. Posted by Archit Shah on September 10, 2008 @ 11:18 | Permalink
I don't get it. How is ASN different from eBay's internal Automatic Bidding System? Even if it isn't exactly the same, ABS makes the baseline eBay auction more like a Vickerey auction than a regular English auction. As such, I don't think ASN really changes the incentives of the non-ASN bidders much.
5. Posted by revenue equivalence on September 10, 2008 @ 11:58 | Permalink
If, in equilibrium, everyone uses sniper, then we simply have a sealed bid first price auction. Expected revenues should be the same.
6. Posted by Ned Snow on September 10, 2008 @ 12:08 | Permalink
Archit,
The ABS bidder has no time to raise his ceiling after being outbid by an ASN bidder. Assuming that bidders raise their ceilings, ASN diminishes eBay profits.
7. Posted by Christine on September 10, 2008 @ 12:33 | Permalink
Until recently, eBay has both been very hands-off and very pro-seller. To avoid liability in many quarters, eBay has maintained that they are just a facilitator, not a warrantor, or a monitor, or an enforcer. Perhaps this is why eBay has never altered the format to deter the sniperbidder. I have to say that, as a former eBay addict in 1999, I soon swore off eBay because (1) the arbitrage opportunities seemed to diminish and (2) I spent too much time on auctions only to be outbid at the last second. In the past nine years, I have occasionally bid on "Buy it Now" items, but actually stopped using eBay altogether because of the PayPal phishing I kept getting.
Also, I think eBay is moving to a more "Buy it Now" format, which will take care of the sniper bidder also.
8. Posted by MDF on September 10, 2008 @ 13:04 | Permalink
I agree with Archit. I don't get it. All this does is make eBay's current quasi-Vickrey auction system (where you see the winner but not the winner's reserve price prior to the end of the auction) into a pure Vickrey auction (where you see neither the winner nor the winner's reserve price prior to the end of the auction). If everyone bids their reserve price, there should be absolutely no difference. The only way ASN works is if people don't bid their reserve prices or if they modify their "reserve" prices in response to others' bids (in which case these aren't really reserve prices).
The only question I have is why doesn't eBay do this themselves? And the only explanation I have is that eBay is counting on a degree of human irrationality in bidding, where people's valuation of an object varies according to their perception of other people's valuation.
But that can't be right. That's just silly...
9. Posted by sc on September 10, 2008 @ 14:52 | Permalink
I agree with Snow. Auctionsniper probably brings ebay business it might not have otherwise. Also it can prevent vindictive bidders who have been outbid. For instance, usually bidders bid in round increments and sometimes when my max bid is outbid, but the increment isn't round, I bid again just as a vindictive way to drive up the price. Auction sniper prevents this by not allowing you to go back and raise your max bid.
10. Posted by Ned Snow on September 10, 2008 @ 15:27 | Permalink
MDF,
As irrational as it may seem, I contend that bidders do change their "reserve" price (at least when they're not outbid by ASN). After their ceiling is reached, bidders often re-evaluate the product's worth. The phenomenon is not so silly, for when it comes to consumer preferences and shopping, rationality may not be the guiding principle.
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