How Serious is Shill Bidding in Online Auctions? Evidence from eBay Motors

Using data from eBay Motors, this paper empirically estimates the prevalence of shill bidding and its effects on the outcomes of online auctions. Since most bidders have partially concealed their IDs, we first develop a procedure to identify the bidders. We then construct a shill-bidding index, wherein we split all auctions into one group which most likely contains shill bids, and another which does not. Our estimates indicate that around 9% of bidders are shill bidders and 22% of all listings contain shill bids. Using the instrumental variable approach for the regression, we show that shill bidding is actually two practices in one. First, it starts the auction with a reserve price as a ratio to the Blue Book price 0.08 lower than the usual auctions, thereby increases trade probability by 0.38%. Second, phantom bids are placed to compete with other bidders, which increase the ratio of the transaction price to Blue Book price by 0.055 on average, but have no effect on transaction probability. The construction of the shill index also enables us to test, and reject, a recent theory that links shill bidding and sniping.