Shill Bidding in English Auctions Draft Version

Under certain circumstances shill bidding is profitable to sellers even under the classic auction model where buyers have independent private valuations. An English auction that allows shill bidding can result in a higher expected seller profit than first and second price sealed-bid auctions. Shill bidding is wide-spread in e*bay because its auction rules and detection methods fail to prevent or catch shill bidding. We introduce a mechanism that can make shill bidding unprofitable by emphasizing the role of a third party, an auctioneer, who charges a seller a commission fee based on the difference between the winning bid and the seller’s reserve. We analyze the seller’s optimal strategy under this fee schedule and suggest additional measures an auctioneer should take to ensure the proper implementation of this mechanism. (JEL D44). The Internet provides auctions that are accessible to the gen-eral public. Anyone can easily participate in online auctions, either as a seller or a buyer, and the value of items sold ranges from a few dollars to millions. To respond to this demand, on-line auction houses have sprung up, supported by the revenue model of charging sellers listing and commission fees. Com-pared to physical auctions, these listing and commissions fee