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Information Asymmetries in Pay-Per-Bid Auctions: How Swoopo Makes Bank

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Abstract: Recently, some mainstream e-commerce web sites have begun using `pay-per-bid` auctions to sell items, from video games to bars of gold. In these auctions, bidders incur a cost for placing each bid in addition to (or sometimes in lieu of) the winner`s final purchase cost. Thus even when a winner`s purchase cost is a small fraction of the item`s intrinsic value, the auctioneer can still profit handsomely from the bid fees. Our work provides novel analyses for these auctions, based on both modeling and datasets derived from auctions at Swoopo.com, the leading pay-per-bid auction site. While previous modeling work predicts profit-free equilibria, we analyze the impact of information asymmetry broadly, as well as Swoopo features such as bidpacks and the Swoop It Now option specifically. We find that even small asymmetries across players (cheaper bids, better estimates of other players` intent, different valuations of items, committed players willing to play `chicken`) can increase the auction duration significantly and thus skew the auctioneer`s profit disproportionately. We discuss our findings in the context of a dataset of thousands of live auctions we observed on Swoopo, which enables us also to examine behavioral factors, such as the power of aggressive bidding. Ultimately, our findings show that even with fully rational players, if players overlook or are unaware any of these factors, the result is outsized profits for pay-per-bid auctioneers.

Biography: Michael Mitzenmacher is a Professor of Computer Science in the School of Engineering and Applied Sciences at Harvard University. Michael has authored or co-authored over 140 conference and journal publications on a variety of topics, including Internet algorithms, hashing, load-balancing, erasure codes, error-correcting codes, compression, bin-packing, and power laws. His work on low-density parity-check codes shared the 2002 IEEE Information Theory Society Best Paper Award and won the 2009 SIGCOMM Test of Time Award. His textbook on probabilistic techniques in computer science, co-written with Eli Upfal, was published in 2005 by Cambridge University Press.

Michael Mitzenmacher graduated summa cum laude with a degree in mathematics and computer science from Harvard in 1991. After studying math for a year in Cambridge, England, on the Churchill Scholarship, he obtained his Ph. D. in computer science at U.C. Berkeley in 1996. He then worked at Digital Systems Research Center until joining the Harvard faculty in 1999.

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