Wednesday, January 25, 2006

Bidding to lose: ethical or not?

Have you ever gone onto ebay and placed a bid on something that you didn't actually want to win? Before you cry out "shill bidding!" let me explain. According to ebay, shill bidding "is bidding that artificially increases an item's price or apparent desirability, or bidding by individuals with a level of access to the seller's item information not available to the general Community." Clearly, based on the second part of the definition, shill bidding is unethical and ebay rightly disallows it. But what about the first part of the definition? What does ebay mean by "artificial"?

Consider the following scenario: a bidder sees an item and bids on it to raise the price of the item, but he does not really want to win it. Yet, the bidder agrees to the fact that his bid is binding and will not retract it, so if he happens to wins the auction, then he will buy the item. In other words, it's a gamble on the part of the bidder.

Why would this ever happen? Well, some people own items that they feel are worth a certain amount of money. When they see those items being sold on ebay at a very low price with very few people bidding on them, they might feel the desire to bid on the item just to raise the price and spur interest, thereby protecting the value of their own item without actually hoping to win it. Keep in mind, in this scenario, the bidder is not associated with the seller at all, and if he wins the item, he knows he is obligated to pay for it and he will. Such a bidder has the following motivations: 1) He increases the value of things that he feels are deserving, and 2) There's the thrill of very possibly winning the auction by accident.

Is this unethical, "artificial", another form of shill bidding? Looking through ebay's policies, I can't find anything that explicitly says it's not allowed. Is there even a term for this type of bidding ("ebay roulette" is the closest I could find)? I imagine that people might do this on auctions for items they themselves want to sell later, so that demand for those items will be kept sufficiently high.

When I mentioned this to a friend, he found the very idea of it to be abhorrent. Is it? Usually, when discussing ethical issues, we talk about who is being harmed. Clearly, the seller is not being harmed in this scenario. The bidder is not harming himself beyond the situation he has willingly placed himself in. Other bidders might be harmed in the sense that they aren't able to get a great bargain anymore, but it's debatable whether or not that was their right to begin with. I think the crux of the issue is whether or not the bidder who doesn't want to win is bidding in good faith. On one hand, he is bidding in good faith, because he will accept the final outcome even if it's not in his favor. He is not in contact with the seller in any special way, and he has no idea what other people are bidding. On the other hand, it is generally understood that people bid in order to win, not just to raise the price of an item. Does this practice violate a basic social contract? Does it undermine the trust necessary to maintain an auction community?

What do you think? Is this practice unethical? Should it be discouraged? Do you have any experience in this matter? If you've done this before or consider yourself a victim and want to share your story, I'd love to hear about it. Feel free to comment anonymously if you want.


  1. I wouldn't want to make it a habit... but I can see where I might do that. I have done the thing where I bid on a few random things, and then forget about it. I've only won a few when I do that, but yeah, the thrill of getting an email saying, "You just won random crap you don't need" is worth the entertainment value at least.

    BTW, you wouldn't want to by a set of monkey stickers would you? ;)

  2. I have two points to make:

    1. "Ethical" and "unstated social convention" aren't too far apart in this example. It is unstated, but assumed that in a market like eBay, one only bids with the intent to buy. That's the unstated premise of eBay. However, now that eBay is ubiquitous in our market, it itself is a form of detering market value.

    2. This effect already happens in the stock market. For example, Microsoft has _bought back_ it's own stock to keep its own stock prices high. If you understand how stock trades happen, then you recognize that bidding is part of the process. Keeping a high stock value has all sorts of benefits for a company, of course.

    Both of these markets have different "unstated social conventions". Naively, I feel that for eBay, the practice is unethical, but for the stock market, I feel that it is ethical.

    Why do I feel this way? Not completely sure. But it certaintly is interesting to think about, as all markets start to globalize.


  3. This kind of bidding is really, OK, because it adds a sense of thrill. But if I found out my friend bid on something I wanted at an outragous price, just to annoy me, I make a big deal out of it. So really it depends of the reason you do this kind of bidding, for kicks or thrills.

  4. The mechanism by which a company's stock price increases when they buy back their own stock is different than the pricing effect of a bid in an e-bay auction.

    In an e-bay auction, extra bid activity acts as a signal to bidders that the item in question as interest and that it's underlying market value may be higher than what a bidder originally thought.

    Stock buybacks operate under the formula where (total value of company) = (stock price) X (# shares outstanding). Under securities law, companies cannot own stock in themselves. So when a company buys back their shares, they are taking those shares "out of play." That reduces the (# shares outstanding) and thus increases (stock price) because such stock repricings can obviously ahve no effect on the actual value of the company.

  5. I have posted the question on an auction forum and received a few responses. Here is the thread:

    In general, people who have spoken up on that thread don't seem to be heavily against the practice. It sounds like they expect such bidding to occur, in which case the practice might in fact adhere to the "unstated social convention", as ChiralSym puts it.

  6. Hi Corporate T00l,

    Thanks for that correction about stock buy-back. I tried to remember what I had read earlier, now that you've corrected my understanding.

    I remember reading an article where Microsoft bought back its own stock, and it was seen as a form of market gamesmanship. Sort of like a stock split, where in theory, the company's value does not change from the split. But in practice, the market often responds by giving the company a higher total value.

    In a similar way, I'm wondering if a stock buyback can also push the stock value "psychologically" or through supply/demand Meaning, with fewer shares to move around, the stock is somehow "more scarce" which might push the value up.

    I'm obviously not an expert on economic and markets, but I've found them to be really interesting. If you have any thoughts or extra tidbits, please share them.

    Advertising and market gamesmanship may be forms of "induced value" which are interesting to think about.


  7. I thought it over, and then I felt bad and embarassed, because I got my
    facts wrong about how companies buy-back their own stock. I'm sorry about that. :/

    I've been thinking it over. So long as you pay (if you win the bid), then there is probably nothing unethical. It might be irksome, or "not nice," but wouldn't be wrong. Afterall, the seller is trying to get the best price in the bid.

    Even so, it feels a little funny to me.


  8. If you are willing to pay what you bid - who cares why you bid....

    I have bid on items hoping to get them for very little - guess what, my bid 'raised the value' of the item.

    I have bid on items as a lame way to put a place marker on them (this was especially before I was familiar with the 'watch this item' feature).

    I have found an obscure item that was being under bid and bid on it being quite confident I'd win, then later realized I didn't need it. Rather then retract my bid, I posted the auction link to a forum where I knew the item would be appreciated and stated what my max bid was so others could easily out bid me. Was that also wrong?

    I have been to farm auctions where people bid on crap because its fun to bid and no other reason. If they win, they pay their bill and throw the junk out. Its entertainment for them.

    Again, if someone is willing to pay the bill, who cares why they bid.

    If they drive the price up beyond it's value and you still bid and then win, don't complain about paying too much - you're the one who bid too high...

  9. Hey, how else can a shill bidder develop a bidding history over more than his shill principal's items?

  10. PhilipCohen: It's true that a shill bidder might do this to mask his/her activity. I would argue, however, that people who do this are not necessarily shill bidders.