Shill bidding: Empirical evidence of its effectiveness and likelihood of detection in online auction systems

• Shill bidding significantly increases seller payoffs.
• Sequence of shill-bid placement matters a great deal.
• Buyers are not able to detect shill bidding with information provided by the system.
• Market maker is leading online auction, but did not implement ERM.

Auction participants, academic researchers and the popular press continue to express concerns about shill bidding in online auctions. However, the market makers (auction websites) do not behave as if they view shill bidding as a significant risk. Further, important questions about shill bidding remain unanswered: how easily sellers are able to shill bid, how readily such actions can be detected by the market maker or bidding community, whether shill bidding results in significant economic gains, and which shill strategies are most effective. We report the results of nine weeks of online auction trading. We find that a price premium of between 16% and 44% can be achieved by shill bidding. Importantly, shill bidding is quite easy to implement and neither the market maker nor bidders showed any indication that they noticed. We conclude that market makers should make a careful re-evaluation of the risks of shill bidding, since only they are in a position to take meaningful action to prevent it from occurring.