E-commerce, or electronic commerce, is the new business model that came with the Internet. It emerged as a new platform for business ventures with the aid of the newest technologies to everyone. In line with this, online auctions have also become apparent. Online buying or shopping is now the easiest way to acquire items. Online shops like eBay and Yahoo! enabled millions of bidders from around the world to join auctions. However, even if the internet revolutionized the auction world, it has brought some drawbacks such as reduced information transfer between seller and buyers. Fraud increased with the onset of Internet buying and selling. Opportunism grew wider because of the “anonymity” the internet provides.
According to a survey, there is a high confidence over online bidders that they will receive the product that they paid for. Despite this, there is still a 41 percent reported to have problems. Although more than half of these bidders were able to resolve these transaction issues, the lesser half said that they took no action at all in order to solve the problem.
There are four areas which are useful to understand the views of “deception and information asymmetry” to the problems with the interaction of online buyers and sellers. First, it can be analysed from the viewpoint of market researchers through a theorizing and modelling. Second, problems with asymmetries of information are investigated in the point of economic researchers. Third, skills used in trickery are studied through cognitive science. Fourth, there are several articles that are now can be studied to understand this.
One of the online frauds that are hard to detect is shilling. Shilling happens when a seller tries to increase the price of the product by bidding in his own product. This is also beneficial to the auction since it increases the commission that they receive from the bidding. Somehow, when this problem is reported, these auction platforms are often unwilling to resolve it. It is also hard to prove this kind of fraud because as mentioned earlier, internet provides anonymity. It is hard to exactly point out those who shill among the millions of bidders on online auctions.
In a traditional sense, transactions over auctions are often costless. Information is almost perfect for every buyers and sellers which ensures that they do not collude. Bidders are relatively small in population and are identifiable. Auctions are often isolated events and are not repeated. While in an online platform, auctions are mostly repeated with a larger population of bidders. Because of the capacity of the internet, bidders can be masked and identities will not be easily revealed.
There are three kinds of charges that a seller should pay in an online auction house, a fixed fee, an insertion fee, or secret reserve fees. An insertion fee is charged to a seller to be able to enlist in an auction this then can increase the declared bid of the auction. A secret service fee is the fee placed over an item so it will not be sold until the reserve fee is met.
Paying such fees encourages shilling among sellers. This is one reason that sellers that uses auction houses becomes tempted to shill. This goes to show how the structure of the auction house can affect or even motivate shilling. Another reason that motivates shilling is that it results to higher revenue and higher price of selling items. This is not only beneficial to the seller, but also to the auction house as well. This also leads to auction houses reluctant to identify shill bidders. This is because most of them are big clients of the auction houses which provide for “substantial income”. Another reason is that, even if there are punishments for shill bidders, these only ranges from warning to suspension from the site. Even so, detection is also light and the environment of online houses brings asymmetry of information which reduces detection more.
There are two types of shilling, first is the reserve price shilling and second on is the competitive shilling. Reserve price shilling happens so the seller can avoid fees. Reserve price shilling allows to avoid paying fees or so that the price of a certain item will increase above the secret reserve price.
Competitive shilling is when a seller attempts to “run up the bid”. In this scenario, the bidder will try to enter the auction with the amount higher than the reserve price to make the other bidders pay more. With this type of shilling, the seller is susceptible losing his sale because the seller accidentally wins his auction and ends up paying the commission fee.
There are five hypotheses that Kauffman and Wood (2003) provided. First, those who have done shilling before will more likely shill again. Since they have accepted the risks and have ignored these in the past, they are most likely to ignore these and do it again. Second, sellers who are experience or are expert in this field have lesser tendency to shill and because they are experienced in this field, they are most likely to have a good reputation and are less likely to shill. Reputation is a big thing to lose in the auction world, and is also the hardest one to earn. Third, shilling is motivated with some houses that permits low starting bid. This in turn is associated with sellers being able to shill in order to ensure that bids are higher than their own valuation of an item. Fourth, to avoid accidentally winning their own auction, sellers who shill will participate in the early stage of auction. This attracts for more bidders and auctions runs longer. This says that reserve price shilling is associated to lengthier auctions. Fifth, the common value of an item affects the existence of reserve price shilling of sellers. Lower values make shilling unprofitable and higher value risks greater loss in finance.
Although shilling benefits both the seller and the auction house, it can still be harmful in the long run. Pressure can build up because if the increased dangers of opportunism. Since opportunism will always be put into consideration, buyers will always have a lower valuation of item and honest sellers will suffer and will lower their item prices. This in turn will lower auction house’s revenues.
However, according to Kauffman and Wood (2003), the study only considered “coin auction” but is still believed to have gone through the general characteristics of auctions. Second, a more conclusive data will prove of shilling behavior, but the data of the study is mostly a “conservative estimate”. This requires for more study of the shilling behavior and the relativity of sellers, buyers, and auction houses.
Reference
Kauffman, R.J. & Wood, C.A. (2003). “Running up the Bid: Detecting, Predicting, And Preventing Reserve Price Shilling In Online Auctions”. Retrieved from http://misrc.umn.edu/workingpapers/fullpapers/2003/0304_022003.pdf
