Jump bidding strategies in internet auctions

A bidding strategy commonly observed in Internet auctions is that of ‘jump bidding’, or entering a bid larger than what is necessary to be a currently winning bidder. In this paper, we argue that the cost associated with entering online bids and the uncertainty about future entry – both of which distinguish Internet from live auctions – can explain this behavior. We present a simple theoretical model that includes the preceding characteristics, and derive the conditions under which jump bidding arises in a format commonly used for online trading, the ascending-price auction. We also present evidence, recorded from hundreds of Internet auctions, that is consistent with some of the basic predictions from our model. We find that jump bidding is more likely earlier in an auction, when jumping has a larger strategic value, and that the incentives to jump bid increase as competition increases. Our results also indicate that jump bidding is effective: Jump bidders place fewer bids overall, and increased early jump bidding deters entry later in the auction. We also discuss possible means of reducing bidding costs and evidence that Internet auctioneers are pursuing this goal.