Shill Bidding, Reserve Price and Seller’s Revenue
43 Pages Posted: 29 Nov 2018
Date Written: September 26, 2018
Starting with a low reserve price has been shown in some empirical literature to be surprisingly effective in online auctions, in that it generates greater expected revenue than a high reserve price which is consistent with theory. However, literature has also pointed out that sellers who practice shill bidding also start with a low reserve price. This raises the question of whether this empirical result is only an illusion mainly caused by shill bidding. Using data from eBay Motors, this paper empirically re-investigates the effect of reserve price on the seller’s sale rate, transaction price and expected revenue, taking into account the impact of shill bidding. We first construct a shill score for each listing, then estimate the trade probability and transaction price equations, while controlling for shill bidding. We find that shill bidding increases transaction price, a result consistent with its purpose. Moreover, increasing the reserve price increases transaction price but reduces trade probability.
Despite this, reducing the reserve price still results in higher expected revenue. Finally, our empirical result rejects a recent theoretical prediction that shill bids mainly occur as last-minute bids.
Keywords: shill bid, reserve price, online auctions, eBay, eBay motors
JEL Classification: L81, D44, D82
Suggested Citation: Suggested Citation