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Optimal Bidding in Sequential Online Auctions
Any type of content formally published in an academic journal, usually following a peer-review process.
posted on 01.01.2003by Ashish Arora, Rema Padman, Hao Xu, William Vogt
Auctions are widely used online to conduct commercial transactions. An important feature of
online auctions is that even bidders who intend to buy a single object frequently have the
opportunity to bid in sequential auctions selling identical objects. This paper studies key features
of the optimal bidding strategy, assuming rational, risk-neutral agents with independent private
valuations and sealed-bid second-price sequential auctions. In contrast to previous work on this
topic, we develop our theory using the concept of the “option value” of an upcoming auction – a
measure of the expected payoff from being able to participate in a future auction. This option
value depends, among other things, upon the mean and variance of the future number of bidders.
We derive an optimal bidding strategy in sequential auctions that incorporates option value
assessment. Furthermore, we establish that our optimal bidding strategy is tractable since it is
independent of the bidding strategies of other bidders in the current auction and is only
dependent on the option value assessment. We test and find support for our theory using data
collected on 327 eBay auctions on digital cameras in first two months of 2001.