Applying Game Theory to Win eBay Auctions

Game theorists have made some outstanding developments in auction theory over the past few decades. $32 Billion was made during a British Telcom auction designed by a few good game theorists. It's safe to say they know what they're doing!

Let's look at what Game Theory can do for us when we play the eBay Auction game.

First of all, the eBay actions are winner-pays-loser's-price auctions with a time limit. Here is an example: When the clock runs out, Alice wins the auction for a stuffed animal with a Max Bid of $100. Bob comes in second place with a Max Bid of $50. So, Alice wins the stuffed animal and only has to pay $50. (Actually, Alice has to pay $51, but we'll ignore the extra $1 for simplicity's sake). So it really doesn't matter what Max Bid the winner entered. She will always end up paying Bob's Max Bid (which - by definition - is always lower).

eBay designed these auctions this way because they always result in the exact same outcomes as timed English Auctions (auctions in which each player gradually increases their bid over and over again - until they reach their own Max Bid - then shuts up). The only difference is, you don't have to sit in front of your computer all day gradually increasing your bid. eBay automated that process for you, stopping it's bidding on your behalf either when you win, or when it gets to your Max Bid.

So, the first thing you need to do is determine your real Max Bid for the item that you want to win. You won't tell eBay what this is just yet, but you yourself need to know exactly what that amount is. How do you do this? Start by looking up your item on Amazon.com and nextag.com. Find the lowest price for the item you are bidding on that is offered (include shipping and handling if can). Let's call that price "Price A". It only takes about 3 minutes to look this up. Now find out the cost of shipping and handling that you would have to pay on the eBay item if you won it. Call this price "Ship&Handle". Your Max Bid should be equal to "Price A" minus "Ship&Handle".

Why? Because if your Max Bid was higher than this, you wouldn't want to win the auction because you know you could get a better price for the same item elsewhere! If your Max Bid were lower than this, then you risk losing the opportunity to win the item at a lower cost than you would have to pay elsewhere.

With your real Max Bid set at this value then - in the absolute worst case scenario (ie: a loss) - you end up paying the lowest guaranteed price on the Internet, while still allowing for the best possible scenario - winning the item for much less than the lowest guaranteed price on the Internet. So, now that we have our backs covered, let's look at some bidding strategies that will maximize our chances of actualizing that Best Case Scenario.

First of all, you could do exactly what eBay is designed for you to do: simply enter your real Max Bid right away and see what happens. This is what the majority of people on eBay do, and it makes good sense. But it fails to maximize your winning potential because it doesn't take a few things into consideration.

You see, many bidders don't understand the difference between a regular bid and a Max Bid. They think that their Max Bid is necessarily what they will pay in the end if they win the auction. This misunderstanding causes them to play eBay auctions one-bid-at-a-time... as if it were a Traditional English Auction. This can be exploited, as will be shown shortly.

The second interesting phenomenon is what game theorists call dependent valuation. This is when the player's evaluation of how much an item is worth depends (at least partly) on what other players think it is worth. Many, many eBay-ers go through the following process:

Set their Max Bid just a little higher than the current high bid without ever intending to go higher. Feel the elation of being the new high bidder. Get outbid by another player. Decide that the item really is worth a little more than they thought it was, and start the process all over. Their Max Bid creeps higher and higher and higher.

This phenomenon is mathematically equivalent to the previous one in which people misunderstand the difference between a regular bid and a Max Bid, and thus, can also be exploited. So how do we exploit this? By sniping!

The sniping strategy is this: don't show any interest in the auction at all until the very last 15 seconds. Then enter your real Max Bid. The other players may want to outbid you, but they simply won't have the time! It may seem scandalous, but it is a legitimate strategy and you yourself have probably lost at least one auction to a sniper.

In fact, sniping is an interesting strategy in that it turns an eBay auction into a Vickrey Auction (one in which each player simultaneously submits one and only one secret bid to the auctioneer, and the highest bidder wins the item at the loser's price). The best strategy for the Vickrey Auction is to enter your Max Bid (as calculated a few paragraphs ago). Hence we can conclude:

The mathematically optimal strategy for eBay Actions is Sniping with Your Calculated Max Bid. In other words: wait until there is only 30 seconds left in the auction, then bid your real Max Bid (as calculated). If you follow this strategy you will end up either winning the item at less than the guaranteed lowest price on the Internet, or losing and having to buy the item at the lowest guaranteed price on the Internet. Either way, you are optimizing your shopping experience with Game Theory!

Tactics: The actual sniping can be done manually, or through online services that will enter the bid for you at the last second (just google "eBay sniping" to find the services). The sniping services will enter the bid during the last second or two, whereas you could only do it yourself in the last 15 seconds or so, but don't worry! As long as the sniping is done with less than a minute left of the auction, your odds remain precisely the same for winning as they do if you were to snipe at the last second!. This is because you are entering the full amount for your real Max Bid in what amounts to a Vickrey Auction.

Go ahead; give Game Theory a try during your next eBay experience. You won't be disappointed!