“Suspicious” Bidding

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It may look suspicious when a bid is placed that is just below the reported reserve price on a domain auction. People either know the reserve price is a specific number and the bid falls just below, or people follow along with an auction and they see the next bid just barely meet the reserve price.

The first thought many people have when this happens is shill or fake bidding. People may think the domain owner is in cahoots with the high bidder below the reserve price who knows his high bid won’t meet the reserve and he won’t have to buy the domain name. Essentially, it can be seen as driving up the perceived interest in a domain name without the risk of having to buy the domain name. Obviously, this is not kosher. I am sure this does happen on occasion, but I think there is another explanation.

People who use auctions to sell domain names are often in regular contact with the auctioneer. Sometimes this contact involves asking if certain prospective buyers are contacted, but often the auctioneer initiates the contact to try and get the seller to lower his or her reserve price. If a domain name gets a genuine $1 million bid but the reserve is $1,100,000 and doesn’t sell, nobody makes money.

Auctioneers may try and coax the domain name owner to lower the reserve enough that the next bid hits the reserve price to allow the auction to sell. Thus, a hypothetical auction will look like this:

$1,000,000 bid – reserve not met
$1,000,001 bid – reserve met (hidden proxy bid of $1,100,000)

I have heard people discuss in private that in this hypothetical auction the $1m bid was “fake” to entice other bidders into bidding. The “evidence” is that the next bid, which is $1 higher on a $1 million+ domain name, hit reserve.

While this does look strange, my bet is that the auctioneer induced the seller to lower his bid enough that the next bid would hit the reserve price and sell. The next bid could actually be much higher than the new reserve price and the shown high bid, but the actual proxy bid would not show unless another bidder materialized to compete. Even though the high bidder may have a $1.1 million bid, the high bid that would show is $1,000,001 because that is the reserve price.

It is something to think about the next time you see an auction that looks suspicious because the underbid is so close to the reserve price. It is easy to be suspicious but the explanation might be simple.

1 COMMENT

  1. To me it would be very simple to fix this. Some auction houses need to hold the buyer accountable if they place a bid below the reserve. They should give the ability to the owner to reduce the reserve at any time.

    Basically if you place a bid for a 900k and the reserve is at 1 million that bidder has just bought themselves a name because the owner has that option to drop the reserve price at his or her wish at anytime.

    • That would help reduce fraud, although I don’t know if auction venues would do this. They may prefer to have those big bids than not have them if that means the bid could become the high bid if seller drops reserve.

    • I think that’s fair. Nobody should be allowed to make a bid that is not presumed to be one they are committed to actually paying.

  2. Flippa allows you to lower your reserve after bids have been received. Just as you said, you don’t want to lose out on a deal because of a few dollars.

    That is one explanation, but I’m shill bidding happens quite often in various marketplaces.

  3. I’ll try to illustrate this more clearly as a couple people asked for clarification:

    Bill has a name for sale at auction and the reserve is $1.5 million.

    Joe bids $1 million on the name 2 weeks before auction ends, and it does not hit reserve.

    As the auction winds down and Bill realizes that his auction may not produce a sale, he decides to lower his reserve to $1,000,001 instead of $1.5m. effectively making the next bid hit reserve.

    John bids $1.2 million, but since the next bid increment is $1,001,000, that shows up as bid 2. Nobody else bids so he is the winner.

    Some people might say “wow, that $1m initial bid is suspicious because it was so close to the reserve price. It looks like someone bid that # knowing they wouldn’t be obligated to buy it because it was below reserve. It is strange that the a $1,000 higher bid is all it took to hit reserve.”

    Although this would look suspicious, it wasn’t because the seller wanted to increase the likelihood of a sale by dropping the reserve all the way down at the end of the auction.

  4. Hey Eliott, unrelated to this topic but can you hit me up via email when you get sec. I emailed you a few weeks back and never heard back.

  5. I have been a member of Flippa from the start and completed 250 auctions with a pleasing 100% satisfaction rate earning a Super Sales Status.
    Most domainers have seen shilling between vendor and bidders to work up an inflated/market price. This is why buyers need to do more due diligence with their proposed purchase.
    In my own opinion the most annoying aspect of running auctions is getting false negative comments that are only placed to deter other interested bidders away from your listing. There is an option to delete however this does raise suspicion on the seller. For example I listed a premium website with over 200,000 members that should have reached over $50k but was crucified at $30k after passing the reserve due to calculated comments.
    I have copied a quote from a recent member who summed it up this way quote/unquote: I was warned about people (aka trolls) leaving negative comments on auctions. Sometimes these people are failed sellers who think their time is best spent spreading negativity (news flash, this won’t get you ahead in life OR business). Other times it’s bidders trying to cast doubt to keep the price low for themselves. Keep this in mind when you post or read through the comments. Take them with a grain of salt and when in doubt, just ask me directly 🙂

    Concarnie

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