September 10, 2008
Should AuctionSniper be illegal?
Posted by Ned Snow

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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