Cheating with False Bids

A dishonest seller could use false bids to increase the amount he receives in a second price auction. To see this, assume again that the following bids are made:

Table 13

Bidder	Amount Bid
Tom	$100
Jane	$90
Sue	$30

As before, Tom will win the auction and pay $90. If the seller knew the bid amounts, however, she should bid $99 herself. Such a bid would not prevent Tom from winning, but it would cause Tom to pay the seller $99 rather than $90. The seller, of course, would not want to bid more than $100, for this would cause the seller to win her own auction.

On eBay a seller would not know all the amounts bid. If the above three bids were made, eBay would show that Tom was the high bidder but would indicate that the current price was $90. Consequently, a new bidder wouldn’t know how much he would have to bid to become the high bidder. Thus, a seller making false bids would be taking a chance if he bid more than $90. He might get lucky and bid less than Tom, but he also could bid too much and win the auction himself. If the seller won, he could auction off his good again or withdraw his bid. Both strategies have some drawbacks since sellers must pay eBay a fee for every completed auction and eBay imposes limitations on when a buyer can withdraw a bid.

If eBay allowed it, however, a seller could greatly benefit from making false bids and then withdrawing them if they were too high. A seller could keep raising her false bid by $1 until she won. She could then withdraw her final bid and thus get the maximum possible amount for her product. Making false bids constitutes criminal fraud, however, so a seller engaged in such a scheme would have to be careful about withdrawing too many bids, or eBay might catch on. Presumably eBay understands how sellers could use false bids to fraudulently increase their take, so eBay probably investigates at least some withdrawn bids. If you won an auction in which a bid was withdrawn, however, you should beware that a seller might have been trying to illegally increase the amount you had to pay.

If you fear that a seller might make false bids to increase his price, you should consider bidding only at the conclusion of an auction. This way a seller won’t have the opportunity to test you with false bids.