An Intermediation Shill-Deterrent Fee Schedule (SDFS)

Internet-based online auctions provide unprecedented opportunities for sellers to submit shill bids. Shill bidding increases the seller’s expected utility but deceives buyers and damages auctioneers’ reputation. Because the anonymity of the Internet makes it difficult to catch shill bidders through statistical analysis or encryption, we suggest that the most effective approach is to make it uneconomical to conduct the fraud. To achieve it, we emphasize the essention role of an auctioneer in deterring fraud and design a Shill-Deterrent Fee Schedule (SDFS) for an auctioneer to discourage sellers from shill bidding. We analyze the seller’s optimal strategy under SDFS and what measures the auctioneer should take to ensure the proper implementation of SDFS. (JEL D44).