Auction Markets

Auction markets have been here for a very long time since the existence of humankind. Traditionally auction markets were physical places where people had to travel to to examine and bid on a certain product of interest. However, now these markets can be anywhere due to the internet. Only recently has there been a significant growth in e-commerce as companies are realizing the opportunities and its importance of selling products electronically. This major growth in e-commerce is especially due to the growth in internet users as it has become very accessible. Buyers on internet auctions can now bid and buy anything, anywhere at any time. The most well know internet auction website where consumers can bid is Ebay.

With more than 100 million active users globally, eBay is the world's largest online marketplace, where practically anyone can buy and sell practically anything. Founded in 1995, eBay connects individual buyers and sellers, as well as small businesses. Their collective impact on ecommerce is staggering. In 2011, the total value of goods sold on eBay was $68.6 billion (Ebay, 2012). There are different types of internet auctions where bidders can have different strategies to earn the highest payoff. Their payoff will depend on the other bidder’s strategy. Game theory explains how you can reach your highest payoff given the other’s chosen strategy. What will be the best strategy for Ebay bidders?

This paper will first explain what type of auction Ebay is and how it works followed by the effect of on welfare by internet auctions. Then it will examine the best strategy ebay bidders can take and finally a conclusion will be given.