PREMIUM BIDDING IN ONLINE AUCTIONS An Examination of Opportunism and Seller Preference

We investigate premium bidding in online auctions, where an item receives a higher bid than other identical items that currently are for sale and available for a lower bid. We report empirical results that find that premium bidding shares many characteristics with shill bidding, where a seller establishes a new identity to bid on his own product. The results lead us to believe that much of the premium bidding on eBay is, in actuality, shill bidding. Although the Internet is useful for transferring information between buyers and sellers, transactions in Internet auctions can have a greater information asymmetry than corresponding transactions in traditional environments. This is because current auction market mechanisms allow the seller to remain anonymous and to easily change identities. In fact, Internet auction environments make opportunistic behavior more attractive to sellers because the chances of detection and punishment are decreased. In this research, we show how fee structures in online auctions may motivate shilling behavior. We distinguish between two different types of shilling that exhibit different motivations and behaviors: competitive shilling can be used to make the bidders pay more for an item, and reserve price shilling can be used to avoid paying auction house fees. We then use data on 10,234 eBay auctions during April 2001, with 30,395 bids on 6,954 of these auctions from 2,015 distinct bidders and 1,373 distinct sellers, to analyze a probit model that allows us to test for evidence of reserve price shilling. Our results show that with reserve price shilling, bidders tend to exhibit repetitive bidding behavior patterns, and also book value and starting bids are indicative of reserve price shilling. _____________________________________________________________________________