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Handbook > Auctions > Useful concepts in Auction Theory >Hard close vs. soft close Printer Friendly

Bids via a Software Bidding Agent: "Hard Close versus Soft Close"

Traditionally, real-time ascending-price (or English)auctions used a "soft close": the human auctioneer would not bang his/her gavel to declare the auctioned item to be sold at the last (highest) bid price until it was ascertained that no participating bidder was willing to make a higher bid. In contrast, an English auction with a "hard close" ends at a specific time. Some online auctions use a hars close. For example, auctions on eBay have a fixed end time.

If all bidders use software bidding agents in an English auction with a hard close, then the auction is equivalent.

In order to control for the effects of late bidding, eBay offers a ?software bidding agent.? It works as follows: One only need to tell the software bidding agent the most he is willing to pay for an item (called a proxy bid) along with his initial bid. If someone else bids more, the software bidding agent will automatically increase one's own bid by the minimal bid increment above the other persons bid as long as this does not raise the bid over the maximum. In an eBay auction, the bidder with the highest proxy bid will win the auction and pay only the minimum increment above the second-highest proxy bid.

Interesting bidding strategies are observed in a ?hard close? auction. One strategy is to wait until the final moments before offering a relatively high bid. This csn force other bidders to rethink the matter, but before they have time to do so, the auction may be over. This final-moments bidding strategy is sometimes called "sniping."

The following paragraph from eBay is to instructs bidders to enter their maximum bids as proxy bids early, and thus to defeat any advantage from others' sniping:

?eBay always recommends bidding the absolute maximum that one is willing to pay for an item early in the auction. eBay uses a proxy bidding system. (?) Thus, if one is outbid, one should be at worst, ambivalent toward being outbid. After all, someone else was simply willing to pay more than you wanted to pay for it. If someone does outbid you toward the last minutes of an auction, it may feel unfair, but if you had bid your maximum amount up front and let the Proxy Bidding system work for you, the outcome would not be based on time."

However, the analysis of online auction data shows that the phenomenon of last-minute bidding (or bid sniping) is not trivial. In an exploratory sample of just over 1000 completed eBay auctions sampled in May and June 1999, 28% had 0 bidders, 16% had exactly 1 bidder, and of the remaining 585 auctions, 74% showed multiple bidding (at least one bidder raised his reservation price in the course of the auction), and 18% had bids in the last sixty seconds.

Why is this happening? There are two possible explanations.

One is that informed bidders don't want to reveal their interest in the auction too early. Suppose you are a recognized expert on stamps. If you bid early on a particular stamp, you may reveal to others that this stamp is highly desirable. Perhaps it is better to delay bidding in the hopes that others won't recognize the stamp's value, and then sneak in at the last minute with a winning bid.

The first explanation solves the bid sniping puzzle in the common value auctions with asymmetric information. However, bid sniping also happens in auctions for computer parts, where one bidder's bid isn't likely to influence other bidders' valuations. The second explanation is that bidders bid late in order to avoid bidding war. Ockenfels and Roth (2002) show that in an eBay auction, even with pure private values, it is not a dominant strategy to bid one?s true value early. Therefore, treating eBay auction as an analogy of conventional second-price sealed-bid auction is misleading.

Ockenfels and Roth (2002) test these two hypothesizes by comparing the timing of bids in eBay and Amazon auctions. Amazon second-price auctions also offer bidders an automated bidding agent. However, in contrast to eBay, Amazon.com uses a ?Going, Going, Gone? rule. (i.e., a ?soft close? auction.) The following description is from Amazon:

?We know that bidding may get hot and heavy near the end of many auctions. Our Going, Going, Gone feature ensures that you always have an opportunity to challenge last-second bids. Here?s how it works: whenever a bid is cast in the last ten minutes of an auction, the auction is automatically extended for an additional ten minutes from the time of the latest bid. This ensures that an auction can?t close until ten ?bidless? minutes have passed. The bottom line? If you?re attentive at the end of an auction, you?ll always have the opportunity to vie with a new bidder.?

If the proposed two hypothesizes are true, we would expect to see much less last-minute bidding in Amazon auctions. Indeed, that's what the researchers found. The fraction of bids submitted in the final moment is substantially larger in eBay than in Amazon, and more experienced bidders tend to bid later on eBay, but earlier on Amazon.

Reference

Roth, Alvin E. and Axel Ockenfels "Last-Minute Bidding and the Rules for Ending Second-Price Auctions: Evidence from eBay and Amazon Auctions on the Internet," American Economic Review, 92 (4), September 2002, 1093-1103.

 
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