Shills and snipes

Online auctions with a fixed end-time often experience a sharp increase in bidding towards the end (“sniping”) despite using a proxy-bidding format. We provide a novel explanation of this phenomenon under private values. We show that it is closely related to shill bidding by the seller. Late-bidding by buyers arises not to snipe each other, but to snipe the shill bids. We allow the number of bidders in the auction to be random and model a continuous bid arrival process. We show the existence of late-bidding equilibrium. Next, we characterize all equilibria under a natural monotonicity condition and show that they all involve sniping with positive probability. We characterize the time at which such late bidding occurs and discuss welfare implications.