On cheating in sealed-bid auctions

Motivated by the rise of online auctions and their relative lack of security, this paper analyzes two forms of cheating in sealed-bid auctions. The first type of cheating we consider occurs when the seller examines the bids of a second-price auction before the auction clears and then submits a shill bid in order to increase the payment of the winning bidder, In the second type, a bidder cheats in a first-price auction by examining the competing bids before submitting his own bid. In both cases, we derive equilibrium strategies when bidders are aware of the possibility of cheating. These results provide insights into sealed-bid auctions even in the absence of cheating, including some counterintuitive results on the effects of overbidding in a first-price auction. (C) 2004 Elsevier B.V. All rights reserved.