eBay’s Proxy Bidding: Four Reasons Why Its Better Than BaT’s Two Minute Rule

Jan 2020 | Auction Observations, Under The Hood

In our last installment, we reviewed how “Sniping” is a technique bidders use on eBay to win a desired item by placing the highest bid during the very last few seconds of an auction other bidders cannot respond to. When Bring a Trailer (“BaT”) launched their collector car auction format five years ago, they elected to use a classic “English” auction format, where each bidder enters a single bid and the process progresses higher until no one is willing to go any further.  As a way to combat this perceived problem with eBay auctions, rather than use a fixed ending time for their events, BaT established a two minute “Going, Going, Gone” rule whereby any bid submitting during the last two minutes of an auction automatically adds another two minutes to the clock.  The process continues until no one submits any bids.  All other online collector car auction newcomers to this point trying to model BaT’s success have followed suit with a similar format.

Here’s the thing:  despite eBay being around now for what will soon be 25 years (can you believe that?!), the vast majority of consumers falsely assume eBay works in a similar fashion.  The reality is eBay provides what’s known as proxy bidding which effectively makes their website a modified second-price, or Vickrey, auction.

If you’re not familiar with the term, a true Vickrey auction is a type of sealed-bid auction.  Bidders submit written bids without knowing the bids of the other people in the auction. The highest bidder wins but the price paid is the second-highest bid. This type of auction is strategically similar to an English auction, yet incentivizes bidders to bid their true value. While Columbia Professor William Vickrey first described this style of auction academically in 1961 (and won the Nobel Prize for Economics that year),  stamp collectors have been using this method dating back to 1893.

eBay developed a modified version of the Vickey auction by implementing proxy bidding to mimic the sealed bid aspect.  What is proxy bidding?  Unlike BaT and all of the other current collector car auctions, to bid on eBay, you don’t have to sit in on an auction 24 hours a day, 7 days a week, manually upping your bid every time someone bids against you. You can make your high bid by proxy in an eBay auction. By proxy means that eBay’s automatic-bid feature stands in for you so that your bid rises incrementally in response to other bidders’ bids.

When you enter a proxy bid on eBay, you actually make several small bids — again and again — until the bidding reaches the maximum you specified. If bidding on a collector car starts at $1,000, for example, and you put in a maximum of $15,000, eBay’s computer system enters your bid automatically to increase incrementally so that you stay ahead of the competition, at least until someone else’s maximum bid exceeds yours (at that point, eBay gives you the option to enter a new proxy bid). To mimic the sealed bid aspect, eBay hides the maximum proxy bids entered, so no one else knows for sure whether you’re bidding automatically or your maximum bid and vice-versa.
 
 
 
Here’s a simple example of two bidders.  Like most eBay users, Sam makes one bid at a time in response to other bidders while Rudy enters one proxy bid of $15,000, i.e. the most he is willing to pay for the car. Sam starts the bidding at $1,000 and the minimum increment in this example is $1,000.
 
 
 
 

In this example, Sam decides to bow out at $7,000.  Consequently, even though Rudy placed a maximum bid of $15,000, he only ends paying one increment above the second highest bid, or $8,000.

Now let’s look at how two bidders who leverage Proxy Bidding on eBay might play out.  In this example, the minimum increment is $1,000 and Sam enters a proxy of $7,000, the most he is willing to pay for the car:

In this example, since both Rudy and Sam leverage proxy bidder, each person ended up entering only one bid and eBay’s system handled the rest.

So, if understand properly and used effectively, a savvy eBay bidder can use a high proxy bid in the final minutes of the auction as a way to stave off any Snipers.

When they launched their auctions, Bring a Trailer convinced everyone their two minute rule is a great way to prevent sniping.  We disagree and believe proxy bidding is superior for four key reasons:

  1. Its an effective anti-sniping tool –  bidders who whine about being sniped simply do not understand how proxy bidding works. by placing the true value of what you are willing to pay for an item, even automated sniping software cannot keep up at the last minute generating repeat bids.  If your maximum value ends up being less than someone else’s, then so be it.  Its better to lose an auction than to walk away with the “winner’s curse”, i.e., yes, you may have won the auction but you paid way too much for a vehicle you might not likely get back any time soon.
  2. Its an effective dealer-prevention tool – let’s face it, collector car dealers and brokers are out to make money.  They do that by trying to buy low and sell high.  We believe in free market capitalism and understand their efforts to try and make a profit.  However, these value bidders are allowed on BaT, other online sites, and traditional live venues to bid alongside regular hobbyists even though their valuations are often higher as they ultimately try to resell a vehicle at retail.  By not being sure how many proxy bids are in place or for what value, dealers will be scared off from bidding because there’s a high probability they will end up buying a collector car at too high a price to be able to turn a profit.
  3. It tends to keep prices in check hardly a week goes by these days where someone is writing about a record price paid for a collector car on Bring a Trailer.  We’re convinced that much of this irrational behavior is due to the two-minute rule playing on human nature of people not wanting to lose in the heat of battle rather than rationally being able to walk away.  Proxy bidding allows people to honestly enter the maximum amount they are willing to pay well before the end of the auction.
  4. Its just as exciting – many BaT fans like to watch their auctions during the final few minutes as the clock keeps resetting as people enter final bids.  Depending on the amount of proxy and one-time bids entered near the very end of auction, it can as just exciting to watch with the added benefit of knowing that the end time stated through an auction is indeed the final time.

So, while we don’t foresee BaT and the other online collector car auctions change their method anytime soon, at least you now have a better understanding of how eBay really works.  Their system has been in place for 25 years, so they must be onto something.

Do you agree with us?  Comment below and let us know!

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