Collectible Stocks and Bonds from North American Railroads     by Terry Cox

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eBay auction bidding

The protocol and philosophy for bidding in eBay auctions is remarkably similar to bidding in live auctions, with two major differences:

  • how commissions are paid
  • how sales end

Commissions. Whereas auction houses collect commissions from both buyers and sellers, eBay collects commissions only from sellers. Just as commissions have increased for live auctions, they have also advanced on eBay. Buyers and sellers have both borne commission increases in live auctions; unfortunately, sellers have incurred all the fee and commission increases on eBay.

How sales end. Bidding sessions in live auctions end when no one is willing to outbid the previous bidder. EBay sales end at a specific moment in time.

This difference seems trivial, but masks a deceptive complexity that creates a deep and pervasive misunderstanding of the whole eBay bidding process.

eBay's "automatic bidding" system. Conversations with many correspondents and friends strongly suggest that average buyers only partially understand the automatic bidding system. While eBay explains the process online, it seems few people actually read the material and fewer still understand the ramifications. If there is one thing I would ask eBay to improve, it is their communication about how their bidding system works.

(I beg everyone who is truly interested in understanding the eBay proxy bidding system to visit eBay Help pages. Simply look under "Bidding and Buying.")

I think the eBay system is as close an analog to the live auction process as can be managed with programming. The eBay system embraces these major assumptions:

  • high bid wins,
  • bidding advances by specific bid increments,
  • bid increments increase as prices advance,
  • bidding stops at a specific instant in time,
  • bidders know exactly how much they are willing to pay.

Quoting eBay, "Our automatic bidding system makes bidding convenient so you don't have to keep coming back to re-bid every time someone places another bid."

EBay goes on to explain, "We'll place bids on your behalf using the automatic bid increment amount, which is based on the current high bid."

Conversations with all sorts of collectors and dealers, even very experienced ones, tell me that a huge percentage of bidders do not believe this simple concept.

EBay has tried forever to explain its bidding process, I have certainly wasted countless hours talking and writing about it. I have found the best way to illustrate the concepts is to go through a typical sale step by step.

Example of automatic bidding - Example 1.

In this example, none of the bidders really understand eBay's bidding system. Let me first set up a few assumtpions:

The situation:

  • The Seller wants to sell a certificate. He does not know that the certificate has sold elsewhere for $100 to $150. He starts his auction at 99¢. His auction will be a typical 7-day auction.
  • Bidder 1 is an intermediate collector. He has bought a sufficient number of certificates on eBay to know that sellers often do not know how to describe certificates. He knows there may be undisclosed problems. He suspects that the certificate should be worth at least $100 in today's market, but is always suspicious of undisclosed problems. Unfortunately, Bidder 1 has a vacation planned and will leave before the sale ends.
  • Bidder 2 is less experienced, but guesses the certificate ought to be worth at least $40.
  • Bidder 3 does not have a good idea of value, but knows he has never seen the certificate before.
Day Comment Bid entered Current bid displayed Next acceptable bid
1 Sale starts.     $0.99
3 Bidder 1 finds the certificate online. There are no bids, so he puts in a $6 bid. He'd like to have the certificate for his collection, but is going on vacation. Maybe he'll get lucky. $6.00    
3 eBay computers automatically place bids on behalf of every bidder involved. Bidder 1 is the first bidder and now has a standing bid of $6.00   $0.99 $1.04
4 Bidder 2 spots the certificate. The eBay screen says that he must put in a bid of at least $1.04, which he promptly does. $1.04    
4 eBay computers automatically place bids on behalf of every bidder involved (Bidder 1 and Bidder 2.) Bidder 2 is instantly outbid by Bidder 1's standing $6 bid.      
4 Bidder 2 refreshes his screen and finds he has been outbid. He wonders, "How did that happen?"   $1.29 $1.54
4 Bidder 2 places a $4.50 bid. $4.50    
4 eBay computers automatically place bids on behalf of every bidder involved (Bidder 1 and Bidder 2.) Bidder 1's standing $6 bid is still the high bid.      
4 Bidder 2 refreshes his screen and discovers he has again been outbid.   $4.75 $5.00
4 Bidder 2 refreshes his screen and sees he is somehow outbid again. He gets mad and puts in a $15 bid. "That will show him!" $15.00    
4 eBay computers automatically place bids on behalf of every bidder involved (Bidder 1 and Bidder 2.) Bidder 2 now has a standing bid of $15.00. The next lower bid is $6. Consequently, Bidder 2's bid is now the high bid. eBay posts the bid at one bid interval above the next lower bid.      
4 Bidder 2 sees he is now the high bidder.   $6.50 $7.00
6 Bidder 3 finds the certificate on eBay and sees it is one he does not have. The screen tells him that he must place a bid of at least $7. He thinks is going to play it safe and doubles the bid to $14. Maybe he can "steal" this certificate. $14.00    
6 eBay computers automatically place bids on behalf of every bidder involved. (Bidder 2 and Bidder 3). Unfortunately for Bidder 3, Bidder 2's standing bid is still the highest bid and the automatic bid advances one bid interval higher than the second highest bid.      
6 Bidder 2 notices he is still the high bidder, but at his maximum bid. He's now worried he might lose the auction.   $14.50 $15.00
7 Bidder 3 comes back, and sees he was outbid by 50¢. He raises his bid a few dollars. Bidder 2 does the same thing. They go back and forth between each other, ratcheting the price up a few dollars each time.      
7 Sale closes. Bidder 2 is the winner. $55.00    

How did everyone fare in this situation? Obviously, eBay is happy for its commissions. The buyer is happy to have received $55 because he was expecting much less.

Bidder 1 comes back to see that he has missed out on a really good deal and is disappointed. Bidder 3 is okay with how everything turned out, because he did not feel like bidding $56 or more. He thinks maybe he dodged a bullet! Bidder 2 is theoretically happy, but now has a touch of buyer's remorse. He says to himself, "I only wanted to pay $40 and somehow I ended up paying $55. I wonder if I got a good deal or not."

So where's the problem? If Bidder 1 had known the rules of automatic bidding, he could have won the certificate and still gone on vacation.

Don't understand the odd jumps in price? This reflects eBay's bidding increments.

Example of automatic bidding - Example 2.

In this example, bidder 1 fully understand eBay's bidding system. Behavior of the other bidders is the same.

Day Comment Bid entered Current bid displayed Next acceptable bid
1 Sale starts.     $0.99
3 Bidder 1 finds the certificate online. There are no bids, so he places a $75 bid. He'd like to have the certificate for his collection, but is going on vacation. If he wins, great! If not, he will be satisfied that the certificate went to someone who wanted it more than him. $75.00    
3 eBay computers automatically place bids on behalf of every bidder involved. Bidder 1 has a standing bid of $75.00   $0.99 $1.04
4 Bidder 2 spots the certificate. The eBay screen says that he must put in a bid of at least $1.04, which he promptly does. $1.04    
4 eBay computers automatically place bids on behalf of every bidder involved. Bidder 2 is instantly outbid by Bidder 1's standing $6 bid.      
4 Bidder 2 refreshes his screen and finds he has been outbid. He wonders, "How did that happen?"   $1.29 $1.54
4 Bidder 2 places a $4.50 bid. $4.50    
4 eBay computers automatically place bids on behalf of every bidder involved. Bidder 1 is still the high bidder and his standing bid is still $6.00.      
4 Bidder 2 refreshes his screen and discovers he has again been outbid.   $4.75 $5.00
4 Bidder 2 refreshes his screen and sees he is somehow outbid again. He gets mad and puts in a $15 bid. "That will show him!" $15.00    
4 eBay computers automatically place bids on behalf of every bidder involved. Bidder 1's standing $75 bid again outbids Bidder 2 in nanoseconds. The bid raises to one increment above Bidder 2's bid of $15.   $15.50 $16.00
5 Bidder 2 gives the deal more thought. "Okay, I think this certificate is worth $40 and not a penny more. I'll bid $40 and that's my best and final offer!" $40.00    
5 eBay computers automatically place bids on behalf of every bidder involved. Bidder 1's standing $75 bid again outbids Bidder 2 in nanoseconds. The bid raises to one increment above Bidder 2's bid of $40.   $41.00 $42.00
Bidder 3 finds the certificate and sees it is one he does not have. The screen tells him that he must place a bid of at least $42. He puts in a $43 bid. That should be enough." $43.00    
5 eBay computers automatically place bids on behalf of every bidder involved. Bidder 1's standing $75 bid outbids Bidder 3 and the bid raises to one increment above Bidder 3's bid.   $44.00 $45.00
5 Bidder 3 sees he is outbid, so decides he will wait until a few minutes before the sale ends. He'll bid a few more dollars in the closing minutes of the sale and hope to "snipe" the high bidder. He thinks, "There is no possible way the high bidder can respond that fast!"      
7 Bidder 3 comes back on day 7 and raises his bid a dollar, only to see himself outbid yet again. He then waits until a few seconds before the sale closes and raises his bid to $54. Time counts down and at four seconds before the sale closes, he hits his Enter key and places his bid. A few seconds later, he realizes he has been outbid by only a $1.00! "How come I keep getting outbid?" he wonders. $54.00    
7 The sale closes. Bidder 1 is the winner at $55.00, well below his original $75 bid. $55.00    

So how did everyone fare in this second situation?

The seller received the same amount of money. EBay's position was the same, so it received the same amount of commission (fees.) Bidder 2 got out of the sale at his original price estimate and didn't get buyer's remorse. Bidder 3 tried to snipe the certificate but lost, leaving the sale a little befuddled. "How did the winning bidder keep outbidding me so fast?" Bidder 1, however, is much more satisfied. He enjoyed his vacation and won the certificate, knowing he had left "nothing on the table."

EBay says, quite plainly, "We'll bid only as much as necessary to make sure that you remain the high bidder".

By understanding eBay's automatic bidding system, Bidder 1 understood that he would never overpay. He knew he could have been outbid by as little as $1, but considering his absolute top-dollar price was $75, he would not have been disappointed. If he had thought the certificate was worth more than $75, he would simply have bid more. If a collectors wants an item and bids his top dollar, he will never pay more than his bid amount. There is simply no sense in bidding more than once.

The #1 rule for bidding in auctions. This takes us to my contention that bidders MUST always establish the absolute maximum price they are willing to pay before they ever place a bid. I explain this rationale more fully in my discussion of auction bidding. Never, never, never bid more than your maximum estimated price. NEVER!

The long and the short of it. IF bidders establish their EXACT maximum bid prices, and bid those amounts, then they should never walk away from any sale disappointed.

Conversely, If they are ever disappointed with the outcome of a sale, either by winning or losing, then they simply did not establish their maximum bid. They need to re-examine their auction practices.

The wonderful benefit of this approach is that you will never need to deal with last minute eBay bids again. Once you place your best bid, you never need to make another bid. Ever. It does not matter whether you place your bid seven seconds before the end of a sale – or seven days before. If you are willing to pay the highest price, then it is simply not possible to lose to last minute bidders ("snipers").

Sniping.

Please understand that snipers can never win a single sale unless they are willing to pay more than the second highest bidder. It is exactly as simple as that!

I cannot tell you how many times I have had snipers argue that they win items by being the last bidder. With apologies to their beliefs, they are simply deluding themselves. The only reason snipers ever win auctions is by being the highest bidder at closing time. Snipers DO win sales, but not by being better bidders or being the last bidders. Snipers win by taking advantage of people who don't fully understand auction concepts.

Read eBay Help screens fully. You will never see a reference to being the last bidder. Under "How to Bid", eBay clearly says, "Enter your maximum bid." eBay does not explain its rationale very well, but it is not kidding.

One final word. Remember that a snipe-hunt is simply another word for a wild-goose chase.

What about "shill" bidding. A "shill" bidder is someone who bids in order to artificially increase prices. Conceivably, shills can be family members, roommates or employees.

It is impossible to truly prevent shill bidding. But, please understand that not all activity that looks like shill bidding really is.

EBay, eBid and other online auction businesses have strict rules against shill bidding and will investigate any activity that seems suspicious. Penalties can range from mild warnings to law enforcement remedies. Shill bidding is nothing to mess with. In live auction situations, auctioneers face fines and jail time for allowing or condoning shill bidding.

EBay thoroughly explains the rules against shill bidding and has a multi-page tutorial on the subject. Publicly, eBay seldom says anything about the degree to which shill bidding might exist. It is known, however, that eBay has bid pattern tracking software that analyzes sales, bids, feedback, photo hosting, timing, and IP addresses.

While some shill bidding almost certainly exists, I personally don't think it is severe. Maybe I'm a Pollyanna, but so far, I have never encountered anything that even remotely seemed like shill bidding. None of my correspondents have ever reported anything like that to me.

Silliness. I once read a serious commentary on the web that suggested that readers might avoid shill bidding on eBay by placing bids only in the last minutes of auctions (sniping.) If that is how someone wants to go through life, okay. But remember, snipers can win auctions only by being high bidders. They cannot win by being the last bidders. Besides, being the last bidders does not in any way insure against shill bidding that may already have taken place. If shill bidding took place on any day prior to the end of a sale, then what exactly do snipers gain by bidding only in the last minutes of day seven? Screwed is screwed.

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(Last updated Feb 14, 2010)

 

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