International Journal of Accounting Information Systems 16 (2015) 4254

Contents lists available at ScienceDirect

International Journal of Accounting

Information Systems

Shill bidding: Empirical evidence of its

effectiveness and likelihood of detection
in online auction systems
Alexey Nikitkov , Darlene Bay 1
Brock University, 500 Glenridge Ave., St. Catharines, ON L2S 3A1, Canada

a r t i c l e

i n f o

Article history:
Received 15 March 2013
Received in revised form 4 February 2015
Accepted 5 February 2015
Available online 6 March 2015
Keywords:
Online information systems
IT audit
Fraud
Shill bidding

a b s t r a c t
Auction participants, academic researchers and the popular press continue to express concerns about shill bidding in online auctions. However, the market makers (auction websites) do not behave as if they view
shill bidding as a signicant risk. Further, important questions about
shill bidding remain unanswered: how easily sellers are able to shill
bid, how readily such actions can be detected by the market maker or
bidding community, whether shill bidding results in signicant economic gains, and which shill strategies are most effective. We report
the results of nine weeks of online auction trading. We nd that a
price premium of between 16% and 44% can be achieved by shill bidding.
Importantly, shill bidding is quite easy to implement and neither the
market maker nor bidders showed any indication that they noticed.
We conclude that market makers should make a careful re-evaluation
of the risks of shill bidding, since only they are in a position to take
meaningful action to prevent it from occurring.
Crown Copyright 2015 Published by Elsevier Inc. All rights reserved.

1. Introduction
Anecdotal evidence from current periodicals and blogs suggests that shill bidding is a signicant issue for
users of online auction sites. For example, a high-prole eBay drop-off store was accused of shill bidding in a
series of articles on the PurseBlog.com discussion boards (http://www.ecommercebytes.com/C/blog/blog.
pl?-/pl/2012/5/1337308248.html, May 2012). eDrop-off sued both the person posting the accusation and
PurseBlog.com in California and Illinois. The defendants responded with counter lings in both states.
Alexey Nikitkov thanks Brock University for the grant that helped facilitate this study.
Corresponding author. Tel.: +1 905 688 5550x3272; fax: +1 905 688 9779.
E-mail addresses: anikitkov@brocku.ca (A. Nikitkov), Darlene.bay@brocku.ca (D. Bay).
1
Tel.: +1 905 688 5550x4524.

http://dx.doi.org/10.1016/j.accinf.2015.02.001
1467-0895/Crown Copyright 2015 Published by Elsevier Inc. All rights reserved.

A. Nikitkov, D. Bay / International Journal of Accounting Information Systems 16 (2015) 4254

43

A vigorous discussion about the reality of shill bidding ensued as hundreds of responses were posted on
ecommercebytes blog pages. Some of the comments, left by traders who clearly had a great deal of experience
with online auctions, described their encounters with shill bidding and expressed frustration with the spread
of shill bidding and the lack of action taken by the web site's management (see Illustration 1). The incident
was clearly not seen as an isolated example or as unimportant by those posting comments, indicating that
shill bidding is viewed as an important problem by auction website users.
The academic literature has also identied shill bidding in online auctions as an important issue. However,
empirical research has been limited by the inability of researchers to unequivocally identify transactions that
include shill bidding. While some methods to identify shill bidders have been proposed, each requires gathering many different types of data and involves making assumptions that not all nd convincing (Kauffman
and Wood, 2003; Trevathan and Read, 2006; Nikitkov and Bay, 2010; Dong et al., 2009; Engelberg and
Williams, 2009; Ford et al., 2010; Xu, et al., 2010). The crux of the problem is that publically available
Illustration 1
Response to ecommercebytes.com blog posting (http://www.ecommercebytes.com/C/blog/blog.pl?/pl/2012/
5/1337308248.html).
I will preface this by saying ***THIS IS ALL MY OPINION*** BASED ON YEARS OF WORKING WITH T&S
AND EXPERIENCE LOOKING AT SHILL BIDDING.
let's just take an objective look at some recent listings (SIC):
item 2210159****** (completed)
bidder a***a - N almost 400 bids on 300 items with 92% only on this seller
bidder 8***g - N268 bids on 133 items, 87% WITH 51 bid retractions over the last 6 months
bidder a***n - N310 bids on 137 items, 97%
and the best: l***l - N 350 bids on 105 items, 100% This bidder's name is also known, has 7
feedback ALL from the above-mentioned seller.
There are a few other bidders that are iffy, but I'm giving those the benet of the doubt (even though
they were 80-ish%).
Next item up for consideration:
item 27097555****
bidder k***c - N121 bids on 64 items 100%
another appearance by a***a - N393 bids, 301 items 92%
NOW, let's take a look at some random bidders: one of the unluckiest bidders I've seen:
r***n (4), 30-Day Summary
Total bids: 777
Items bid on: 144
Bid activity (%) with this seller: 100%
i***r, 30-Day Summary
Total bids: 83
Items bid on: 75
Bid activity (%) with this seller: 98%
d***a, 30-Day Summary
Total bids: 196
Items bid on: 20
Bid activity (%) with this seller: 100%
And unfortunately, this list goes on ad innitum. You can click on ANY auction and nd this kind of bidding
pattern.

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A. Nikitkov, D. Bay / International Journal of Accounting Information Systems 16 (2015) 4254

information is not adequate, making it necessary to rely on circumstantial data and probabilistic assessments
of whether shill bidding has occurred. Transactions that seem to represent clear instances of shill bidding cannot be conrmed as such since only the auction house has access to the data that could be used to do so.
Market makers (online auctioneers) have apparently not responded proactively to shill bidding and the threat
it poses to the user community and the integrity of the market. While they control the data that would be necessary
to more clearly identify problematic transactions, they almost universally prevent the public and even auction participants from accessing that data. For example, while eBay prohibits shill bidding and posts sanctions that will be
imposed against violators, it denies access to information that would enable bidders to form a reasonable judgment
about the presence or absence of shill bidding. Since September of 2007, when eBay redesigned the Bid History
page, actual bidding identities are known only to the seller. Further, penny auctions (such as the recently popular
pennygrab.com) may generate substantially increased prots if shill bidding is employed, which not only raises the
nal selling price, but extends the bidding process and requires bidders to purchase more bids, which must be paid
for in advance. Thus, the practice of requiring bids to be purchased in advance of placing them on a specic auction
seems to directly benet sellers who shill bid at the expense of buyers.
From an enterprise risk management (ERM) perspective, this failure to address what is seen by both users
and academics as a signicant risk is interesting. First, market makers may simply be unaware of the degree of
shill bidding and the risk that it poses. In view of the size and level of success of several online auction houses,
this is unlikely. Second, it may be that shill bidding occurs less often than has been thought. This, too, seems
unlikely in view of the outcry seen on the blogs. Alternatively, market makers could believe that no real economic benet is obtained by shill bidders and thus no real harm is done to the buyers. This would indicate that
no long term negative impact will accrue to the auction sites as a result of shill bidding. It is also possible that a
costbenet analysis convinced the market makers that the costs of controlling shill bidding outweigh any
benets associated with such actions. Without access to the decision making process of the market makers,
it is impossible to know why shill bidding seems to be ignored. However, it seems most likely that it is viewed
as a relatively low level risk that would cost more to control than is warranted.
Academic research to date has not explained the reasons for the observed lack of response of market makers
to shill bidding. Since all major websites prevent access to the data, research about shill bidding is sparse and
results are often conicting. For example, some analytical studies nd that the potential for shill bidding reduces
prices, thereby decreasing prots to sellers (for example, Chakraborty and Kosmopoulou, 2004) while others
nd that sellers can increase their prots by shill bidding (for example, Graham et al., 1990; Lamy, 2009). Further, some researchers believe that bidders who bid quickly after being outbid might be shill bidders (for example, Ford et al., 2010) while others indicate that an equally plausible explanation may be the so-called hotheaded bidder (Hlasny, 2006). Thus, a great deal remains to be studied with respect to online shill bidding:
how easily it can be implemented, how readily it can be detected by the market maker, whether it results in
an economic gain, how signicant the economic gain is, what strategies shill bidding sellers employ, and the impact of shill bidding on other members of the online auction community. Answers to all of these questions are
important in evaluating the apparent risk management postures of the market makers.
This study attempts to address these essential questions about shill bidding. A natural experiment was
conducted by offering items for sale in online auctions and observing the responses of bidders and the market
maker to attempts to bid up the prices. We worked closely with the Research Ethics Board of our university in
conducting this study and never allowed any independent bidder to purchase an item on which a shill bid had
been placed. The results show that shill bidding does allow the seller to increase the nal price. In addition,
there was no response to the shill bidding from the market maker. Finally, shill bidding in a sequence of auctions affects price more than a random series of shill bids.
The rest of this paper is organized as follows. The next section reviews the literature about the denition,
identication, and impact of shill bidding. Next, we analyze the responses of the market makers to the risks
posed by shill bidding from an ERM perspective. Following that is a description of the research questions
for the current study and the methodology. We then present the results and provide a discussion of the implications of the ndings.
2. Literature review
Shill bidding is dened as bids placed by the seller or a confederate on her own items for the purpose of
increasing the nal selling price. While shill bidding has been a potential problem long before online auctions

A. Nikitkov, D. Bay / International Journal of Accounting Information Systems 16 (2015) 4254

45

were developed, it has become more difcult to detect and prevent in the virtual version of the auction. This is
a function of the ease with which information systems permit the creation of several identities by the same
user, the ability of a confederate to act without being physically present or even geographically close, and
the inability of the system to detect prohibited activity among hundreds of thousands of transactions.
2.1. Types of shill bidding
Several different types of shill bidding have been reviewed in the literature. These types can be organized
into three main categories: reserve price shilling, signaling effect shilling, and price-squeezing shilling. Reserve price shilling is used to eliminate the need for open disclosure by the seller of her true reservation
value while still preventing the item from being sold at a lower price. Some researchers believe that openly
stating a high reserve price may reduce the number of interested bidders and therefore decrease the eventual
selling price (Gerding et al., 2007). A shill bid placed near the beginning of the auction has the same effect as a
reserve price without being public and, therefore, discouraging to potential bidders. In addition, a lower stated
reserve price may result in lower fees to the auction house, depending on the specic fee schedule being
employed (Kauffman and Wood, 2003).
Signaling effect shilling may also be used to convince potential or current bidders to increase their valuation of the item. If bidders' valuation functions are not independent, then a bid may be viewed as a signal that
another bidder, perhaps with superior information, is willing to pay a higher price (Lamy, 2009). In addition,
the number of bidders in any auction provides some indication of the valuation others place on an item. Thus,
shill bids can be used to make an auction appear more important due to the (articially) increased number of
bidders (Chakraborty and Kosmopoulou, 2004). Other (honest) bidders may respond by adjusting their own
valuation upward and either joining the auction or entering higher bids.
Price squeezing, or competitive bidding, is used to extract the highest possible bid from a bidder who had
already indicated a strong interest in the item (Engelberg and Williams, 2009). The shill bidder enters a competitive bid but at a very small increment above the current bid, which is intended to encourage the honest
bidder to increase her bid. This type of shilling is particularly effective if a proxy bidder2 is being used (for example, eBay or Manheim car auction). The shill can enter bids at the least possible increment, causing the
proxy bidder to increase the bid of the honest bidder whose current bid may be below her maximum bid.
In this way, the true valuation of the bidder can eventually be discovered and extracted by the seller
(Barbaro and Bracht, 2006; Engelberg and Williams, 2009).
2.2. Impact of shill bidding
While the major online auction sites may publically seem to believe that shill bidding is not a signicant
problem, the actual level of such activity and its impact on the price, the sellers, the buyers and the market
remains unclear. Because shill bidding can be almost impossible to positively identify, empirical studies of
the frequency and impact of shill bidding are few. However, several analytical studies, experiments, and simulations have been conducted that attempt to determine how sellers, honest bidders and the auctioneer (or
market maker) are impacted by shill bidding.
The results of the extant studies with respect to the incentive of the seller to shill bid and the short and long
term impacts of a decision to shill bid have been inconsistent. On the one hand, some studies show that, in
equilibrium, the potential that the seller might shill bid causes bidders to protect themselves by bidding
less than the optimal bid (Jenamani et al., 2007) which in most models has been shown to be the private valuation of the item for each bidder. Thus, nal prices and prots may be decreased (Kosmopoulou and De Silva,
2007) and market efciency is eroded (Gerding et al., 2007). Other studies, however, show that sellers do
prot by shill bidding (Graham et al., 1990; Kauffman and Wood, 2003; Engelberg and Williams, 2009) and
that, under some assumptions, no equilibrium exists without shill bidding (Wang et al., 2002).
Results with respect to the impact on bidders are similarly inconsistent. Experimental evidence exists that
the potential for shill bidding does not cause bidders to avoid the market (Kosmopoulou and De Silva, 2007)
and that when shill bidding is allowed and openly conducted, the optimal bid is not reduced (Graham et al.,
2
A proxy bidder allows the potential buyer to enter her maximum bid. The information system then manages the bidding process such
that her bid is automatically increased each time a competing bid is entered until her reservation price has been exceeded.

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A. Nikitkov, D. Bay / International Journal of Accounting Information Systems 16 (2015) 4254

1990). However, if sellers successfully implement a shill bidding strategy, bidders may pay higher prices than
they would otherwise (Wang et al., 2002). Alternatively, it has been suggested that shill bidding may actually
benet bidders by reducing the occurrence of the winner's curse, or the chance that a bidder may end up winning the auction but at a higher price than originally planned (Kosmopoulou and De Silva, 2007). To the extent
that bidders decide to place a bid that is lower than the optimal bid due to the potential existence of shill bidding, the risk exists of losing an auction that closes at a price less than the bidder's actual reservation value
(Bhargava et al., 2005).
2.3. Identifying shill bidding
A consensus seems to be developing that honest bidders cannot adequately identify shill bidders due to
lack of sufcient, readily available information (for example, Hlasny, 2006; Ford et al., 2010; Dong et al.,
2012). Analytical research suggests that, given the potential for shill bidding, bidders should reduce their
maximum bid below the amount at which they actually value the item by an amount that depends on the
number of bidders and the probability that the seller will shill bid (Chakraborty and Kosmopoulou, 2004). Another proposed adjustment for bidders is to drop out of the auction when the bid amount exceeds the expected price (Dong et al., 2012). However, both suggestions depend on knowledge that a casual bidder may not
possess (probability of shill bidding or expected price). Further, while both will work in the aggregate, individual buyers or sellers may achieve less than optimal outcomes. For example, reducing the maximum
price may result in some bidders failing to win an auction even when they would have purchased the item
at the nal price had no fears of shill bidding been present.
Like individual bidders, individual sellers are powerless to prevent the problem. As noted by several researchers, no mechanism exists by which a seller can credibly commit to refrain from shill bidding (Wang
et al., 2002; Chakraborty and Kosmopoulou, 2004; Kosmopoulou and De Silva, 2007). In an experimental setting, there is evidence that shill bidders, when publicly announced, are punished by bidders with a lower price
in subsequent auctions (Kosmopoulou and De Silva, 2007). However, no clear public information about which
sellers have engaged in shill bidding exists on the major online auction houses. Thus, a reputation for honest
dealing is not possible to attain and sellers who do not wish to engage in shill bidding cannot differentiate
themselves from those who do.
Researchers have attempted to empirically identify shill bidding in online auctions by rst carefully examining the strategy and then attempting to isolate characteristics that might, taken together, allow suspicious
bidders to be detected (Kauffman and Wood, 2003; Trevathan and Read, 2006; Nikitkov and Bay, 2010;
Dong et al., 2009; Engelberg and Williams, 2009; Ford et al., 2010; Xu et al., 2010). While each model is different and is based on a slightly different understanding of how shill bidding is being implemented, results are
quite similar. All of the studies cited above nd many cases that are quite suspicious, leading the researchers
to conclude that shill bidding in online auctions is not an infrequent event. Unfortunately, none of these studies can denitively prove that shill bidding has been successfully identied, since access to data that would
verify a connection between the suspicious bidder and the seller is not possible.
Other limitations with respect to shill bidding identication have also been identied. Perhaps the most
important is that these studies, as noted above, depend on assumptions about the strategy of the shill bidder.
The strategy of a shill bidder may change from auction to auction or even during an auction (Graham et al.,
1990; Wang et al., 2002). Thus, a model intended to identify one type of shill bidder may not successfully identify others and may fail to nd shill bidders who change strategy in response to the bids that are being placed.
Another limitation of shill identication models is that they often require information from many auctions
and are thus not helpful for individual bidders to employ in determining if they are being victimized by a
shill bidder. Finally, the characteristics that are used to determine if a bid is suspicious are nearly always subject to alternative explanations (Hlasny, 2006).
2.4. Responses to shill bidding by the market makers
Thus, it seems clear that the potentially negative impact of shill bidding on buyers, honest sellers and the
market in general poses a risk to the continued effectiveness of online auctions. Further, the only stakeholders
with sufcient access to data to both identify problematic transactions and to impose sanctions are the market

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47

makers. The principles of Enterprise Risk Management (ERM) would suggest that the large internet auction
sites should identify this risk and take action.
ERM is a process designed to identify potential events (risks) that may affect the entity and to manage the
associated positive or negative impacts in order to provide reasonable assurance that the rm's objectives will
be achieved (COSO, 2004). ERM is intended to be implemented on a rm-wide basis and to be integrated with
strategy discussions and initiatives. The traditional risk management approach, in contrast, leaves risk identication and control to the separate units within the company, a.k.a. the silo approach. The ERM approach
treats all risks as part of the company's overall risk portfolio that is managed holistically (Liebenberg and
Hoyt, 2003), which is expected to be more successful at limiting risk than the silo approach.
Risks under ERM are dened as the events that have a negative impact on the ability of the company to
achieve its objectives, which are divided into four categories: strategic, operational, reporting, and compliance
(COSO, 2004). The potential proliferation of shill bidding meets this denition and could impact the market
maker at several of the levels of its objectives. If shill bidding is not sufciently controlled for, cases of shill bidding inevitably will increase and may also increase in severity as some sellers explore the boundaries of the
potential benets. Over time, if shill bidding continues to increase in frequency and severity, it will be increasingly noticed by the trading community and the press and may provoke a response from law enforcement,
and regulatory bodies. At the strategic level, an online auction site's entire business strategy depends on the
willingness of buyers and sellers to interact via its platform, which may be threatened if shill bidding becomes
widely recognized as a major issue. At the level of operations, egregious shill bidding incidents may require
implementation of emergency measures which tend to be costly. Public exposure may bring into question
the reliability of internal controls and nancial reporting, and the effectiveness of compliance with antifraud-related laws and regulations.
While many companies have implemented the ERM framework to increase the effectiveness of their risk
management activities in the last decade, they do not often make it explicitly known. Internet auction sites are
no exception. However, recent research suggests that important determinants of ERM adoption include: appointment of a Chief Risk Ofcer, high independence of the board of directors, explicit calls by the CEO or CFO
for internal audit involvement in ERM, a Big Four auditor, size of the company, country of domicile, and industry (Kleffner et al., 2003; Liebenberg and Hoyt, 2003; Beasley et al., 2005). To investigate if the internet auction
market makers seem to be implementing ERM principles, we gather information from the websites of the top
6 international online auctions (http://online-auction-sites.toptenreviews.com/index2.html) on these characteristics (see Table 1). We nd only one company, Taobao, in our sample which explicitly discloses adoption
of ERM. This company also closely meets the previously established determinants: TaoBao is a subsidiary of
Alibaba, one of the largest companies in the world, it is audited by PWC, 50% of the Board of Directors are independent, and it has established a Chief Risk Ofcer position. There is little evidence that the other ve leading online auctions have adopted ERM.
An alternate source for evidence that the auction houses are actively managing the risks associated with
shill bidding would be efforts to communicate that risk both within the organization and externally (COSO,
2004). Only one company from our sample, eBay, clearly states that it does not allow shill bidding, and
warns sellers to follow the established guidelines (http://pages.ebay.com/help/policies/seller-shill-bidding.
html). It cautions that IDs of users participating in shill bidding may be temporarily or permanently
suspended. The company encourages buyers participating in online auctions to report suspicious activities,
promising to thoroughly investigate every report. However, neither those ling a report nor the trading community in general receive any information on such investigations. The company cites its privacy policy which
prevents it from disclosing the details of the investigation to other members. The other companies in our sample of the top 6 online auction houses post no disclosure on their websites to indicate that they see shill bidding as a risk and are attempting to address the issue.
In summary, we nd little evidence that the major auction web sites are taking signicant action to detect
and prevent shill bidding. One must consider that the market makers are either unaware of its existence or
they are aware and have chosen a limited response. ERM suggests four potential responses to an identied
risk: avoiding, accepting, reducing and sharing (COSO, 2004). Absent any evidence of efforts to avoid, reduce
or share the negative impact of shill bidding, it appears that the market makers have decided to accept this
risk.
A risk is considered acceptable if it does not exceed the rm's risk appetite (COSO, 2004). Risks may be analyzed on the basis of the level of impact and the likelihood of occurrence. Those that are low on both

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A. Nikitkov, D. Bay / International Journal of Accounting Information Systems 16 (2015) 4254

Table 1
Meeting determinants of ERM adoption for largest online auctions.
Name

Ownership

Chief risk
ofcer

% independent
board of directors

ERM adoption
publication

Big Four
auditor

Monthly visitors
(proxy for size)

Country
domicile

eBay1
eBid.net3
Onlineauctions2
TaoBao6
uBid5
WeBidz4

Inc.
Private
Private
Inc.
Private
Private

No
No
No
Yes
No
No

91%
N/A
N/A
50%
50%
N/A

No
No
No
Yes
No
No

PWC
N/A
N/A
PWC
N/A
N/A

120,000,000
36,000
39,000
316,605,000
3,200,000
124,000

USA/Int.
USA/Int.
USA
China/Int.
USA
USA

This table contains data gathered from the websites of each online auction. Data was current as of February of 2014 and is presented in
alphabetical order by rm.
1
www.ebay.com
2
www.onlineauction.com
3
www.ebid.net
4
www.webidz.com
5
www.ubid.com
6
www.taobao.com

characteristics may be ignored, while those that are high on both clearly fall outside the area of the rm's risk
appetite and require a proactive response. As long as shill bidding continues to be difcult to identify, it will be
a high probability risk. It therefore appears that market makers consider it to have a low impact. The vast and
spontaneous response that cases like eDropOff vs. PurseBlog invoke call this assumption into question. Should
proliferation of shill bidding occur, the snowballing effect in the trading community and increased awareness
of the shill bidding may change it from the low to high impact category.
There are some reasons that market makers may accept the risk associated with shill bidding. Several researchers have suggested that the market maker has more to gain than other parties from shill bidding. If shill
bidding results in higher prices overall and the market maker charges a commission, it will benet from the
higher prices (Chakraborty and Kosmopoulou, 2004). Aggressive attempts by the market maker to counteract
shill bidding may be met by resistance from sellers, who may migrate to another marketplace, reducing the
overall effectiveness and related revenue stream to the market maker. In addition, it might be data and
time intensive to gather the necessary information, check it for accuracy and impose sanctions. Therefore, it
appears that the market makers have little incentive to control shill bidding.
Currently, market makers have apparently made a decision to accept shill bidding as a low impact risk and
may even benet from shill bidding in the form of increased payments from sellers. However, if buyers were
being harmed enough, they would become aware of the magnitude of the issue and might respond actively,
forcing market makers to re-evaluate their position. It may be that buyers notice shill bidding and simply
choose to accept it as a cost of doing business in a forum where prices are generally lower than in other markets. Alternatively, it may be that buyers understand that they have insufcient evidence to prove shill bidding. Some may have chosen to simply not use the website, while others do the best they can to protect
themselves.
3. Research questions
While there is clear evidence that researchers and some members of the user community are concerned
about shill bidding, the behavior of the market makers would seem to indicate that the problem is either
not pervasive or of little economic impact. Importantly, the actual ability of sellers to use shill bidding to increase their prots remains an open question. Even if sellers can increase the price at which the auction closes,
the amount of the increase is unknown. Several of the studies that propose models to identify shill bidding
provide evidence that it does occur. Therefore, it seems unlikely that sellers would take the risk of shill bidding
if it were not protable. However, we have no direct evidence of the effectiveness of shill bidding. Thus we
propose the following two research questions:
RQ1: Can shill bidding be used to increase the payoff in an online auction?
RQ2: How large is the premium generated by shill bidding?

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49

In addition to evidence about the actual impact of shill bidding on the nal price, the economic impact of
this strategy must be understood in the context of the associated risks to both the individual seller and to the
market maker. One risk to the shill bidder (known as the shiller's curse) is that the shill bid will be the nal bid
and the seller will be forced to re-list the item. Further, if buyers were able to identify sellers that are using this
technique, they might make such information public, causing the risk of losing potential future buyers and of
action by the market maker. While we have found little evidence that the market makers are acting to discourage shill bidding, the degree to which they respond to problematic transactions is still an open question. Thus,
it is important to understand the likelihood of detection for sellers who choose to shill bid:
RQ3: Are buyers likely to be able to detect a shill bidder?
RQ4: Does the market maker take action against a shill bidder?
4. Method
In order to address our research questions, we implemented an experiment on a large online auction. We
conducted 101 identical auctions for a computer memory card. We chose this item since it is easy to acquire
and is in relatively high demand, thus ensuring our ability to secure product and that our auctions would generate some response. Also, our intention was to generate results for business as usual or typical transactions
so we selected a fairly popular, but inconspicuous product. We did not wish to inate our results by using
must have products, like Apple iPhone, beats headphones, or designer clothes. Finally, we chose a produce
we could acquire and sell with a limited research budget.
For nine weeks, we listed from six to fteen auctions per week. In about half of the auctions, we placed several shill bids in an effort to increase the nal price being offered. We worked closely with our Research Ethics
Board to ensure that due attention was paid to the interests of the market maker, other sellers, and buyers
during the experiment. We paid all the fees due to the market maker and responded quickly and as requested
when we received communications from the market maker during the experiment. We listed only a limited
number of cards for sale (less than 15) in a given week, so as not to substantially interfere with the offers and
trade of the other sellers. During the time of the experiment there were 26 other sellers offering from 1 to 610
similar cards each. Thus, all buyers had ample opportunity to purchase the same card from other sellers, and
our auctions represented only a small proportion of the cards being offered. Based on this evidence, we feel
condent that our auctions had no impact on market price. Perhaps most importantly, we ended each auction
in which a shill bid had been placed by placing a very large bid at the end of the auction, ensuring that no honest bidder would pay the articially raised price. Cards in the auctions in which no shill bid had been placed
were sold to the highest bidder. We took the necessary precautions to ensure that this real-life experiment
had a negligible impact on the market maker and the community.
Prior to the experiment, we attempted to create fteen new user IDs, such that registration would involve
only ctitious information and newly created generic (e.g. gmail) accounts. Five of these accounts were
agged by the market maker's system and personal identifying information was required. We opted not to
provide this information and retained only ten accounts. For these ten user identities we completed a number
of transactions unrelated to the project and received ve-star positive feedback. This step was required to insure that these identities appeared sufciently innocent when used in the subsequent experiment; identities
with no feedback are easily spotted by other auction participants and usually viewed with suspicion.
After the new identities were acquired, we used an old and trustworthy-seeming user identity as the
seller to list the auctions. This ID has been used for trading with the market maker for several years and
had received 100+ positive feedbacks. In order to rule out the impact of product presentation on the auction
ending price, we studied and closely matched our presentation to that of the competitors' on 15 characteristics.3 Such close matching serves to establish a valid comparison between the results of our experiment and
prices achieved by the other sellers of the same product.

3
These were: content of the item description; stock picture; return policies; shipping method, price, and policies; seller reputation;
product's brand, capacity, content, and color; duration of the auctions; location of the seller and product; payment method; timing of
the auctions (same day as the competitors' for the same weeks).

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We began our experiment assuming that the bidding process for each auction would be independent of
previous and subsequent auctions. Thus, our initial shill bidding strategy was F-S-F-S-F-S, where F is an auction free from shill bids and S is an auction manipulated by shill bids. As our experiment unfolded, we observed that the dynamic of successful shill bid placement was contrary to this initial expectation: placing
shill bids in one separate auction appeared to inuence the ending price least, especially if the next auction
was free from any shill bidding activity. Before proceeding, we tested this observation by analyzing the data
from week one using a regression model with price as the dependent variable and type of auction (shill bid
or free) as the independent variable. The results are contained in Table 2. The coefcient of transaction type
in the tted model has a p-value of 0.946 indicating that it is not signicant. Hence, we concluded that
there is no effect of shill bidding in the week with intermittent application of shill bidding.4
Having determined that an alternating shill and free strategy was not effective, in subsequent weeks, shill
bids were placed in a series of auctions ranging from 2 to 9 in a row. We varied the order and duration of sequences of shill bids. In some weeks, the free auctions were the rst few auctions, followed by the auctions
with shill bidding. In others, the order was reversed, with shill bidding auctions coming rst.
5. Results
To analyze the results of our attempts to increase the price with shill bidding, we begin by looking at prices
for the auctions. Table 3 contains information about mean prices in auctions with and without shill bidding
over the course of our experiment. Information is provided separately for the rst week, in which the shill bidding strategy was different from the remaining eight weeks. Before proceeding with the analysis of our results, we analyzed the data for outliers using Z-scores. Two observations were found with Z-scores that
exceeded 3. These observations have been eliminated in what follows.5 As can be seen in Table 3, in weeks
2 to 9, the average price with shill bidding (mean of $20.30) is greater than the average price without shill bidding (mean of $17.26). This difference is statistically signicant (independent samples t-test, t = 6.976; p =
0.000). Thus, RQ 1 can be answered in the afrmative: it is possible to increase the average price using shill
bidding.
We next turn to RQ 2 regarding the economic signicance of the price premium achieved through shill bidding. According to the results of our experiment, the mean price difference between shill-bid-affected auctions and auctions free from shill bidding is $3.04 or 17.6% (if one considers including the results from
week one, the mean difference is $2.70 or 15.7%). As we discuss below, repeated application of shill bidding
may lead to substantially higher price premiums. For example, sequences of shill-bid-controlled auctions resulted in ending prices in excess of $25 for weeks 2, 6, 7, and 9; that is $7.64 or 44% higher than the price in
auctions without shill bidding. The ability to increase the selling price by as much as 44% over the price of honest competitors through shill bidding may represent an important economic benet to those who engage in
this practice. We note that the premium we were able to achieve in our auctions might not be available if
all sellers were shill bidding.
RQ 3 and RQ 4 relate to the possibilities that shill bidding activity would be detected by the buyers or by the
website. We conducted 101 auctions, nearly of which involved shill bidding. Had some evidence surfaced
that either stakeholder questioned the transactions, we could report their responses and discuss how their
suspicions were aroused. However, during the entire experiment, we did not have any indication that our activity was monitored or noticed as suspicious by the market maker or the trading community. There was one
exception. However, it was not a result of our shill bidding activity. The market maker maintains a selling volume restriction: on attempting to post auction #70 we were informed that we cannot post any more listings.
This restriction was lifted in a week when 15 of our previous auctions were completed. We encountered the
selling volume restriction twice before we posted all 101 auctions. Thus, while there is evidence that the market maker monitors transactions for some purposes, there is no evidence that either the market maker or the
buyers became suspicious that shill bidding was an issue.
4
Due to concerns regarding the distribution of such a small sample size, we repeat the analysis using nonparametric tests. The Mann
Whitney U test of means across effects (shill bidding or no shill bidding) results in a value of 12.50, p = .662. A KruskalWallis test for
trend across the 10 transactions results in a Chi-square of 10.0, p = .440.
5
We also rerun all analyses with the outliers winsorized. The inferences based on these alternative analyses are qualitatively the same
as those reported in the body of the paper.

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51

Table 2
Regression results for intermittent strategy.
ANOVA
Model

Sum of squares

Regression
Residual
Total

.002
3.757
3.759

Df

Mean square

1
9
10

.002
.417

Sig.
.005

.946(a)

Coefcients
Model

(Constant)
Shill bidding

Unstandardized coefcients

Standardized coefcients

Std. error

Beta

.418
.062

.023

18.518
.004

P value

44.322
.069

.000
.946

This table contains the results of an ANOVA analysis with price as the dependent variable and shill bidding (0 = no shill bidding and 1 = shill
bid placed) as the independent variable. R2 adjusted for the model was .111. Data is from the rst week of the experiment only.

5.1. Shill bidding strategies

Graphs of prices from two typical weeks are shown in Fig. 1. The patterns displayed in these graphs suggest
that repeated shill bidding results in an increasing price from auction to auction and that repeated lack of shill
bidding results in a decreasing price from auction to auction.
This interpretation of the visual evidence suggests that an interaction exists between repeated transactions and the application or absence of shill bidding. To test this idea, data from weeks two through nine
were used. A regression model was estimated with price as the dependent variable and three independent
variables: transaction number (for the trading week), a dummy variable (effect) taking the value of 1 if the
price was obtained by repeated application of shill bidding and 0 if the price was the result of repeated absence of shill bidding and the interaction of transaction number and effect.
Results of the regression analysis are given in Table 4. Unlike the analysis for week one, the model ts well
(F = 18.65; p = 0.000; R2 adjusted = .378). Importantly, the interaction term is signicant with p value of
0.024 (signicant at 5%). This indicates that sequential shill bidding produces a signicantly different impact
on price than sequential absence of shill bidding. Following procedures from Aiken and West (1991), we use
the data in Table 4 to construct two different regression equations by setting the dummy variable for transaction equal to 1 and then 0:
For shill bidding :
price 19:332 0:23 transaction
For absence of shill bidding : price 18:239 0:116 transaction
The signicant interaction in the regression analysis indicates that the slopes in these two regression equations are different from each other. This means that in repeated transactions with and without shill bidding,
Table 3
Sample descriptive statistics.
N

Mean

Std. dev

Week 1
Free of shill bidding
Shill bidding applied

5
6

$18.56
$18.53

0.371
0.715

Weeks 29
Free of shill bidding
Shill bidding applied

46
42

$17.26
$20.30

1.308
2.627

All transactions
Free of shill bidding
Shill bidding applied

51
48

$17.38
$20.08

1.306
2.537

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A. Nikitkov, D. Bay / International Journal of Accounting Information Systems 16 (2015) 4254

Fig. 1. Prices in representative weeks.

Table 4
Regression results for sequential strategy.
ANOVA
Model

Sum of squares

df

Mean square

Sig.

Regression
Residual
Total

225.344
338.375
563.719

3
84
87

75.115
4.028

18.647

.000

Sig.

24.582
1.131
1.445
2.302

.000
.261
.152
.024

Coefcients
Model

(Constant)
Effect
Transaction number
Interaction

Unstandardized coefcients

Standardized coefcients

Std. error

Beta

18.239
1.093
.116
.346

.742
.966
.080
.150

.216
.174
.369

This table contains the result of a regression with price as the dependent variable and effect (a dummy variable taking the value of 1 if shill
bidding was present and 0 otherwise), transaction number and the interaction of transaction number and effect as independent variables.
R2 adjusted was .378. Transaction number for each trading week begins with one and ends at the last transaction for the week. Data
includes only transactions from weeks 2 through 9.

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53

the effect on price is different. In order to test if each slope is different from zero, we conduct t-tests (see Aiken
and West (1991)) by dividing each simple slope by the corresponding standard error. For the equation with
shill bidding, the t value is 1.399 (p = .170), indicating that the slope is not signicantly different from zero.
For the equation without shill bidding, the t value is 2.324 (p = .025), indicating that the slope is signicant.
The negative coefcient in the model depicting a series of transactions free from shill bidding suggests an
interesting implication: if the seller does nothing to impact the price in his auctions (no shill bidding), the seller should expect the ending auction price to drop with every subsequent listing. Realization of this fact provides a strong motivation for sellers to shill bid. Thus experienced sellers, who may have understood this
aspect of trade dynamics, may resort to shill bidding more often than novice sellers. Secondly, this result suggests that listing many auctions in the short period of time (with an hour, or a day) may be counter-productive
for the seller: the average ending price across a series of auctions would decrease.
The failure to nd a signicant, positive slope for the regression equation with shill bidding in spite of the
evidence from the graphs and the clear price premium as presented above may be a result of the larger standard error of the estimate compared to the standard error of the estimate without shill bidding. This indicates
that there is more variability in price under shill bidding than without. However, it is not really necessary for
both slopes to be signicantly different from zero in the expected direction, since the important question in
this study is whether they differ from each other. The signicant interaction term in the regression analysis
supports a statement that the simple slopes of the two regression equations are statistically different. Sellers
really have only two choices: refrain from shill bidding or engage in shill bidding. If they refrain from shill bidding, the selling price may fall. If they engage in shill bidding, the selling price will likely increase over time.
Thus, our evidence indicates that sellers who shill bid will achieve higher prices than those who do not.
6. Summary and conclusions
Our study provides evidence that, contrary to ndings in some analytical studies, shill bidding can be used
to increase the nal price in an online auction. Further, our results suggest that the economic premium that
can be achieved by shill bidding, which was as much as 44% in some weeks, is substantial. We did not receive
any indication that even one of the many bidders in our nearly 100 auctions developed any suspicions about
our auctions.6 In addition, there were no communications from the market maker that indicated it had noticed
any problems with our auctions. Thus, at the current time and in the market for this one product at a minimum, it is still quite possible to protably shill bid.
The nding that price continues to increase as a result of higher prices in prior auctions of the same seller is
an important contribution of this study. To date, there has been no suggestion in the literature that the effect
of shill bidding could be cumulative across auctions. Based on our data from the rst week of trading, it appears that placing a shill bid on a random basis is not as likely to result in clear economic gain as is an ongoing
program of shill bidding in all auctions.
We have speculated that the market maker's response to the risk posed by shill bidding is to ignore it based
on the assumption that the impact on the rm's strategic and operational initiatives is small. Based on the results of this study, it would seem prudent and in line with best risk management practices to re-evaluate this
stance. Given the ease with which shill bidding can apparently be conducted and the prots that can apparently be garnered, one might speculate that many sellers are currently engaged in this practice. Events such
as those described above with respect to eDrop-off may seem, at rst glance, to support a policy of no response. The market maker was not a party to the lawsuits that resulted. However, the public discussion of
shill bidding and especially the criticism from buyers about the inaction of the market maker may indicate
that buyers are not willing to accept the presence of shill bidding and may foreshadow a time when either regulators or market makers will have to take action.
As long as buyers, even those who demonstrate some degree of suspicion, remain unable to conclusively
identify problematic transactions, the risk that shill bidding represents to market makers may remain limited.
However, if these conditions change, shill bidding becomes a signicant risk. At a minimum, it is necessary for
the market maker to remain alert to changes in the risks posed by shill bidding by continuously paying attention to communications from users as well as monitoring news stories about shill bidding on other websites
6
It is clearly not possible to prove that none of the buyers were suspicious. However, we received no communication from any of them
indicating any problems. Further, no actions were led against us with the market maker.

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A. Nikitkov, D. Bay / International Journal of Accounting Information Systems 16 (2015) 4254

and the related responses on blogs and other public fora. In addition, communications from buyers to the market maker should be taken seriously. It would be particularly important to maintain historical information
about the number and economic magnitude of such reports.
As with all research, this study has some limitations that should be mentioned. We did only trade for nine
weeks and conducted very few transactions, relative to total transactions on the website. In addition, the price
premium we achieved would not necessarily be the same across all products and for all sellers who shill bid. It
is also possible that a larger program of shill bidding across many more auctions might have attracted the attention of the market maker.
Further, the current study had to use relatively low ticket items due to research budgetary constraints.
Whether shill bidding can result in such high price premiums for high (or higher) ticket items remains an
open question. However, sellers of high ticket items have a strong incentive to engage in shill bidding since
the absolute value of the price increase (in terms of dollars) may be signicantly higher. On the other hand,
shill bidding on these items might attract more attention if buyers are more sensitive to the risk and the market maker is more vigilant and would respond to evidence of shill bidding more actively. How much public
exposure is required before action must be taken and whether high ticket items should be monitored more
diligently than others are among the questions that remain to be answered.
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