Cost and Trust Issues in On-Line Auctions

Many auction mechanisms, including rst and second-price ascending and sealed-bid auctions, have been proposed and analyzed in the economics literature. We compare the usefulness of di erent mechanisms for on-line auctions, focusing on the di erent costs of determining reservation prices, determining bids and communicating bids, and on whether the auctioneer is trusted. Di erent auction formats prove to be attractive for agent-mediated on-line auctions than for o -line ones. For example, second-price sealed-bid (\Vickrey") auctions are attractive in encouraging truth revealing behavior, and avoiding the communication costs of the multiple bids of a rst-price ascending (\English") auction and the \gaming" required to estimate the second highest bid in rstprice sealed-bid auctions. However, when bidding agents are cheap, communication costs cease to be important, and the English auction is preferred, since it often allows bidders to save the e ort of estimating their value for a good. As another example, we show that when an on-line auction is being conducted by a non-trusted auctioneer (e.g. the auctioneer is selling their own items), rational participants will build bidding agents which transform second-price auctions into rst-price auctions.