An Experimental Assessment of Confederate Reserve Price Bids in Online Auction

Abstract

Confederate bids (i.e. bids placed by sellers´ confederates) are sometimes assumed to enhance sellers´ revenues, if not detected by bidders. As compared to public reserve prices, confederate bids may be used to increase bidding activity (perhaps causing "auction fever") or to evade placement costs without increasing the risk of unacceptably low prices. We present two field experiments with parallel auctions of identical units of a popular DVD and a memorial coin using three different reserve price and confederate bid settings. We find statistically indistinguishable prices and price dispersion in all three auction types. Sellers´ payoffs, however, are significantly lower with public reserve prices, due to placement costs.