Applying Game Theory to Win eBay Auctions

Game theorists have made some outstanding developments in auction theory over the past few decades. $32 Billion was made during a British Telcom auction designed by a few good game theorists. It's safe to say they know what they're doing!

Let's look at what Game Theory can do for us when we play the eBay Auction game.

First of all, the eBay actions are winner-pays-loser's-price auctions with a time limit. Here is an example: When the clock runs out, Alice wins the auction for a stuffed animal with a Max Bid of $100. Bob comes in second place with a Max Bid of $50. So, Alice wins the stuffed animal and only has to pay $50. (Actually, Alice has to pay $51, but we'll ignore the extra $1 for simplicity's sake). So it really doesn't matter what Max Bid the winner entered. She will always end up paying Bob's Max Bid (which - by definition - is always lower).

eBay designed these auctions this way because they always result in the exact same outcomes as timed English Auctions (auctions in which each player gradually increases their bid over and over again - until they reach their own Max Bid - then shuts up). The only difference is, you don't have to sit in front of your computer all day gradually increasing your bid. eBay automated that process for you, stopping it's bidding on your behalf either when you win, or when it gets to your Max Bid.

So, the first thing you need to do is determine your real Max Bid for the item that you want to win. You won't tell eBay what this is just yet, but you yourself need to know exactly what that amount is. How do you do this? Start by looking up your item on Amazon.com and nextag.com. Find the lowest price for the item you are bidding on that is offered (include shipping and handling if can). Let's call that price "Price A". It only takes about 3 minutes to look this up. Now find out the cost of shipping and handling that you would have to pay on the eBay item if you won it. Call this price "Ship&Handle". Your Max Bid should be equal to "Price A" minus "Ship&Handle".