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Online auctions a tricky business

Jacob Nthoiwa
By Jacob Nthoiwa, ITWeb journalist.
Johannesburg, 11 May 2011

Even though auctions are becoming less popular, online versions like the penny auction model are exploding and are generating massive profit for auctioneers at the expense of bidders.

So says SensePost's security analyst, Glenn Wilkinson, who examined the evolution of online auction algorithms, at the ITWeb Security Summit yesterday.

He discussed how the algorithms and model parameters have been continuously updated in a battle between auctioneers and bidders.

According to Wilkinson, online auctions are not really based on the first person with the highest bid wins the award, and pays the amount of his bid to the seller. The digital space has changed the way bids are made, he said.

“There are various auction models that have been adapted to the digital age.”

Bidders should have a significant understanding of online auction sites such as eBay or BidOrBuy, he said.

“Many bidders do not understand the exploits of online auctions as they bid for the too-cheap-to-be-true item on your favourite auction site.”

An example of this is the penny auction model, where bids placed toward the end of the auction add a small amount of time to the auction. This phenomenon has spurred hundreds of start-ups ever since this practice started taking place.

Modern business

Wilkinson said there are three ways to run a penny auction. There is 'all-pay' or 'tullock' model, where all bidders have to pay regardless of whether they win. “Often used to model lobbying - bids are 'political contributions' - or other competitions such as contests between animals.”

There is also the 'war of attrition' model, he points out. This is a model of aggression in which two contestants compete for a resource of value by persisting while constantly accumulating costs over the time the contest lasts.

“Strategically, the game is an auction, in which the prize goes to the player with the highest bid, and each player pays the loser's low bid, making it an all-pay sealed-bid second-price auction.”

The other model is the 'dollar auction' model where an auctioneer lists an item for sale for a fraction of what that item is worth, he said. The auctioneer then charges everyone who wants to join the auction a certain amount for every bid they make.

In most cases, Wilkinson said, penny auctions are used to cheat the feedback system. “A seller lists a non-existent item for one penny and the buyer gets the item for one penny, meanwhile they both paid their feedback.

“Sellers on eBay also use them to build a mailing list. They use the penny item as a loss leader in order to get a huge number of valuable e-mail addresses,” he noted.

A seller may also use a penny starting bid to attract immediate attention and generate excitement about a popular item they are selling to get the bidding going knowing that the end price of the item they have to offer is generally in a certain range, he explained.

Wilkinson said it is not uncommon to see the one started for a lower bid go for more in the end than the one started for the higher bid due to the excitement generated attracting more bidders and driving traffic to the sellers listing.

Wilkinson advised bidders to understand auction and bidder behaviour to, avoid the failures, and to see the bigger picture of this business.

He said in the study that he is conducting he noticed several users making massive losses like R11 000 per day, with extremely long, active sessions, sometimes of more than 60 hours. This is likely to be automated by site owner to drive up prices.

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