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Dynamic Bidding in Second Price Auction

Author

Listed:
  • Maryam Saeedi

    (The Ohio State University)

  • Hugo A. Hopenhayn

    (UCLA)

Abstract

We consider equilibrium bidding behavior in a dynamic second price auction where agents have the option to increase bids at random times and values follow a Markov process. We prove that equilibrium exists and is unique and give an algorithm to solve for bids as a function of time and values. Equilibrium bids equal the expected final value conditional on the bid placed being the final one, meaning that either the agent doesn't get another opportunity to rebid or chooses not to increase this bid if given the option. This results in adverse selection with respect to a bidder's own future strategy, and as a result bids are shaded relative to the bidder's expected value. This is true in spite of values being independent across bidders. Under mild conditions, desired bids increase as time increases and the close of the auction is approached. Our results are consistent with repeated bidding and sniping, two puzzling observations in eBay auctions.

Suggested Citation

  • Maryam Saeedi & Hugo A. Hopenhayn, 2015. "Dynamic Bidding in Second Price Auction," 2015 Meeting Papers 1346, Society for Economic Dynamics.
    • Handle: RePEc:red:sed015:1346
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    References listed on IDEAS

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    1. Ockenfels, Axel & Roth, Alvin E., 2006. "Late and multiple bidding in second price Internet auctions: Theory and evidence concerning different rules for ending an auction," Games and Economic Behavior, Elsevier, vol. 55(2), pages 297-320, May.
    2. Jeffrey C. Ely & Tanjim Hossain, 2009. "Sniping and Squatting in Auction Markets," American Economic Journal: Microeconomics, American Economic Association, vol. 1(2), pages 68-94, August.
    3. Matthew Backus & Tom Blake & Dimitriy V. Masterov & Steven Tadelis, 2015. "Is Sniping A Problem For Online Auction Markets?," NBER Working Papers 20942, National Bureau of Economic Research, Inc.
    4. Alvin E. Roth & Axel Ockenfels, 2002. "Last-Minute Bidding and the Rules for Ending Second-Price Auctions: Evidence from eBay and Amazon Auctions on the Internet," American Economic Review, American Economic Association, vol. 92(4), pages 1093-1103, September.
    5. Milton Harris & Bengt Holmstrom, 1982. "A Theory of Wage Dynamics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 49(3), pages 315-333.
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    Cited by:

    1. Dominic Coey & Bradley J. Larsen & Brennan C. Platt, 2020. "Discounts and Deadlines in Consumer Search," American Economic Review, American Economic Association, vol. 110(12), pages 3748-3785, December.

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