In the UK, as of 2017, more items are now purchased online than in brick and mortar shops. With the “death of the high street”, a common theme in news headlines, and the ecommerce market increasingly growing, most auction houses have now moved online. No platform is as synonymous with auctions as the retail giant eBay: with £16.7 billion gross merchandise value reported for eBay marketplace for the third quarter of 2018, and over 1 billion listings live at any one time, eBay is the third biggest online retailer in the UK. To put this in perspective, a video game is purchased on eBay every 6 seconds, an appliance every 5 seconds, and a car part every 2 seconds.
Neuroscientists researching decision making and reward processing in the brain are becoming increasingly interested in how people make online purchasing decisions, and how these differ from “in real life”. Research in this area has frequently employed neuroimaging techniques such as EEG and fMRI to investigate the activity of the dopamine reward system. This is a network of interconnecting brain areas that have been shown to be sensitive to various aspects of decision making such as feedback processing, pleasure seeking and outcome, goal, decision and action valuation. Results of such research can contribute to understanding of consumer behaviour and improving marketing strategies, with great economic implications.
Automated Meta-analysis of 470 fMRI studies showing the reward system in the brain. Source: Neurosynth.org
When compared to a brick and mortar auction, it is easy to imagine how the decision making scenario changes when one is bidding on an online format. One’s opponents become anonymous: a player can no longer ‘eye up the competition’, and does not know their opponent’s expertise. The bidder is isolated, and is not able to appraise the item in person, meet the seller, or be caught up in the competitive and fast-paced atmosphere of an auction house. Furthermore, the information that is made publicly available tends to be limited, and the auction itself can last several days or even weeks. These changes in context influence valuation processes, the receipt of feedback and the formation of game strategies.
The eBay auction format is formally known as a sealed-bid second price auction, or Vickrey auction. The winner is the participant who bids the highest value, but they only pay the amount of the second highest bid. The Vickrey auction format was invented in the 1950’s by William Vickrey, a professor of economics and game theorist. The dynamics of the Vickrey auction are different from that of the traditional ascending first price auctions that many people are familiar with (such as those seen on Bargain Hunt). The structure of a Vickrey auction is designed to incentivise truth telling: if you shave your bid –bidding less than the value you place on the item – you risk losing the item to an opponent who bids more, but still ends up paying less than your value. However, if you bid more than your value, you risk winning the item for a higher cost than you value it to be, making a loss overall. Bidding the exact amount that you value the item is the weakly dominant strategy, regardless of the behaviour of your opponents. However, this is rarely the case in reality for the majority of bidders on eBay. Many people submit multiple bids, keeping an eye on the auction for days, wanting to be the top bidder for the duration of the auction, and poised to increase their bid if challenged. Initial maximum bids are repeatedly revalued, with the interest of competitors making the item more valuable.
Neuroimaging studies show that it when evaluating rewards, it is not just the item itself that we value, but also how the item is obtained: the act of winning in a competitive environment has an additional value property separate to the monetary worth of the item in question. When constructing one’s subjective valuation of an item, alternatives are ranked on a common scale to facilitate value-maximizing choice, making them directly comparable. Neurologically, subjective values are averaged firing rates of populations of neurons which are coding our preferences. This means we can compare values of things across categories, for example, the immediate hedonic value of a particular food can be compared to the value of a long term social goal (such as weight loss). In the case of auctions, the monetary value of the item in question, the gratification of beating competitors to winning it, and one’s own performance relative to competitors are added together. This is shown by the increasing activity in the reward system of the brain. However, the investment in the auction process, engaging in “bidding wars”, and the hedonic gratification of winning may result in a common phenomenon called The Winner’s Curse. This is when the winning bid in an auction exceeds the intrinsic value or true worth of an item; the winner therefore ends up winning the auction but making a loss overall. The Winner’s Curse is a persistent phenomenon in auctions, even with experienced and professional auction participants. For example, it has been observed in auctions for oil drilling rights in the Gulf of Mexico, baseball free agency, and in industries such as book publishing, construction, and corporate takeovers.
So how do we combat this? The answer is in an unlikely place: with Sniping Technology. With the rise of online auction houses, the use of Sniping Technology has become widespread. Bid sniping is the action of placing a bid in the very last seconds of the auction so that no other bidders have time to out-bid the sniper before the auction ends. Many snipers use automated software or pay services to place bids on behalf of the sniping bidder. In a popular auction, several snipers may compete for the item in the last 10 seconds or less. The use of Sniping Technology increases the competitive environment at the climax of an auction, drives up final selling prices, and can leave non-sniping bidders feeling robbed. However, for the sniping-bidder, this software forces them to play by the rules of a second price sealed bid auction: You submit your maximum bid and then walk away. By staying away from engaging in the social dynamics of the auction competition this ensures that if you win, you don’t lose.