Thinking Like a Savvy Online Bidder

How to Beat Power Players at Their Own Game

With lenient return policies common, about 9 percent of purchases at brick-and-mortar stores are returned and 25 percent to 30 percent of online orders are sent back yearly in the United States. Where do these items end up? In many cases, the likes of market vendors, wholesale liquidators, eBay PowerSellers and "mom and pop" stores purchase the goods via online auctions and resell the merchandise. The process contributes to big retailers recouping up to 25 percent of an item’s original cost to offset about $260.5 billion per year industrywide in lost sales.

New research from the University of Maryland’s Robert H. Smith School of Business examines a key influencer — the level of bidder experience and savvy — to the bidding process and final sales price. “Bidder inexperience works to benefit the auctioneer and retailer that’s recouping the value of its liquidated products,” says Smith School professor Wedad J. Elmaghraby, co-author of the study with Smith faculty colleague Anandasivam Gopal and 2013 Smith PhD graduate Ali Pilehvar.

The study focuses on liquidated consumer electronics items auctioned and sold “as is” in up-to-1,000 item, noninspectable bundles. As first bidders set the auction tone and trajectory toward final prices, Elmaghraby says, “we find first-bidders with low experience tend to bid smaller, but early.” This spurs other bidders, which increases auction activity and drives up final prices.

But when the low-experience bidder hesitates, Elmaghraby says, the more experienced counterpart tends to come in with a high bid, which influences subsequent low bidding activity and relatively low final sales prices.

Most bidders do their homework to properly estimate the value of the goods by studying relatable, past auction data, Elmaghraby says. The savvy, “power bidders” — a low proportion of B2B auction bidders — tend to bid in multiple auctions concurrently and draw additional data from this “cross-bidding.” They further separate themselves by drawing insight from their own, more robust history of bidding. But their counterparts could close this gap, for example, by strategically monitoring ongoing auctions and just-closed auctions.

Read more: Market Information and Bidder Heterogeneity in Secondary Market Online B2B Auctions is featured in Management Science.