Ebay's Proxy System : A License to Shill

We introduce a bidding strategy which allows the seller to extract the full surplus of the high bidder in eBay auctions. We call this a Discover-and-Stop bidding strategy and estimate that 1.39% of all bids in eBay auctions are placed by sellers (or accomplices) who execute this strategy. We argue that this kind of shill bidding is unnecessarily effective due to eBay's proxy system and the predictability of other bidders' bids. We show that eBay could slightly modify its auction mechanism to reduce the shilling we describe. We also model eBay auctions with shill bidding and find that, in equilibrium, eBay's profits are higher with shilling than without it