Shaily Bahuguna (BGSE) 25.01.2023

Sniping/last-minute bidding is an unusual bidding technique that has been extensively studied in empirical studies of eBay auctions, where bidders compete in a modified sealed-bid, second-price auction format and depart from the predictions of standard economic theory. Using Kőszegi and Rabin’s (2006) theory of reference-dependent preferences, I build a game theoretic model that explains not only late bidding but also overbidding in a private-value eBay auction setting involving a sophisticated, rational bidder and a naive, loss-averse bidder. The latter suffers from pseudo-endowment effect which causes willingness to pay (WTP) for the item to increase while the auction runs. By reserving her bid for late in the game, a rational bidder can prevent intermediate information revelation about relative valuation structure to her opponent. This discourages re-bidding for the loss-averse bidder, thereby preventing higher prices and justifying sniping.