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There is an online auction that has the option to place a max bid (an automated process for the bidder to bid up to a specified value). Also, in the terms & agreement for the auction, it is disclosed to the buyers that the auctioneer can place bids on behalf of the seller. If the auctioneer also knows the max bid (of the real potential buyer, let's called that person BidderA for clarification) and places shill bids (fake bids) to increase the price all the way to the BidderA's max bid, is that illegal?

The buyers and sellers do not know that the auctioneer can see max bids as well.

Edit:

An example for clarification: ItemA's highest bid is $100 and has a minimum of $5 increases. BidderA places a bid on ItemA for $105 but they also are willing to bid up $200 so they place a max bid $200.

The way the max bid should should work is if BidderB places a bid of $150, the auction site will automatically place a $155 bid for BidderA and BidderA is still the highest bidder. If BidderB placed a $250 bid instead, they would become the highest bidder.

Instead, what is happening is that the auctioneer (the company running the auction) sees that BidderA placed a max bid of $200 and places a bid for $195 (for what they claim is on behalf of the seller). This then triggers BidderA to automatically place a bid $200. It basically ensures that whenever someone enters a max bid, they will pay that amount if they win the item regardless of whether or not someone else makes a bid.

  • This sounds similar to what a market-maker in the New York Stock Exchange and other exchanges does, although I concede that I may not be following the example listed as well as I might. – ohwilleke Oct 12 '17 at 9:26
  • Reminds me of "off the wall" bids that are commonplace in UK autions. – Steve Jones Jun 15 '18 at 13:02
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auctioneer can place bids on behalf of the seller

The UCC contemplates seller-bids. https://www.law.cornell.edu/ucc/2/2-328 see paragraph 4.

There's no law about what you describe, but it's certainly pretty dumb. Of course the auctioneer knows the max bids, it's the auctioneers' job to know. Who else would keep track of the information?

As for the actual process being described, I suggest that you might be misunderstanding. It seems more likely that the auctioneer is not the decision-maker, rather the auctioneer places bids at the direction on the seller. In other words, on behalf of means at the direction of.

  • The company that is running the auction is watching the bidder's max in real time and immediately placing bids to increase the price to that point. I'm not very familiar with law but isn't the company bidding not complying to the part about good faith. It seems unethical and I wanted to know if what they're doing is legal as it is where I just started working – David C Dec 18 '15 at 14:56
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    The UCC requires notice, and based on your information, notice is given. The bad faith piece only applies if there is no notice and if the seller is bidding. The method described is similar to a reserve auction and can achieve a similar result save for some psychological effects. – jqning Dec 18 '15 at 15:32
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    @jqning "Some auctions have a Reserve Price. A Reserve Price is a hidden minimum price that the seller is willing to accept for an item. In a Reserve Price auction, the seller is only obligated to sell the item once the bid amount meets or exceeds the Reserve Price. A seller can lower, but cannot raise, the Reserve Price." [emphasis mine] govplanet.com/pop/reserve_price.jsp – Acccumulation Jun 15 '18 at 16:39
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Functionally, the seller placing a shill bid is the same result as if the seller increased the reserve during the course of the auction.

But that probably isn't what is happening. More likely, you and another bidder have both set max bids with automatic incremental answer bids. When this happens, the bid price will almost immediately shoot up to the lower bidder's max.

  • I am asking about if the auctioneer is watching the max bids of bidder's and placing shill bids based on those values. Check my comment under @jqning's answer – David C Dec 18 '15 at 19:16
  • @sharkbyte, yes, I read what you wrote. You fail to consider a far more likely scenario, which is that there is another valid bidder out there just like you, who also set a max bid and automatic re-bid. That other bidder, like you, knows that the item is worth a certain amount and likely set her max bid very similar to yours. When that happens, the price shoots up to the max bid, without anyone having to be at all nefarious! This should tell you who really benefits when you set a max bid! Not you! – dwoz Dec 18 '15 at 19:35
  • check out my edit for an example, the auctioneer/company (whom I just started working for) is placing the bids. I'm not one of the bidders, I know this is happening and want to protect myself if it is illegal – David C Dec 18 '15 at 19:38
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I think this is a really good question! (+1)

The answer comes down to the ethics and policies of the auctioneer and how they want to position and operate in the marketplace.

Prima facie, there is no prohibitive law per se. Seems like they disclosed what they are doing. The questions any user of their services who are buyers should ask are:

  • What reason would I have to ever disclose to the auctioneer my maximum bid?
  • If I do disclose my max bid, why wouldn't they use that against me?

I say, and my read of your question suggests, the auctioneer damn well is using every penny of that max bid disclosure against the buyers and to the advantage of the seller. In fact, the auctioneer is an agent of the seller most likely and, therefore, has a potential obligation to use that information to the fullest advantage of the seller.

Looks like they are telling you (and the marketplace) exactly what they are doing and challenging all comers to do something about it. Unethical? No. From the perspective of agency it might be more ethical than not doing it.

  • I thought it would be assumed that the max bids of the bidders would be confidential, and in this scenario it is not disclosed to the buyers or sellers that the auctioneer has access to this information (it is not addressed anywhere). Does that change anything, or by entering the max bid on the auctioneer's website constitute as giving consent for the auctioneer to access that? – David C Dec 18 '15 at 20:37
  • @sharkbyte: The word confidential should be defined. It looks like confidential might mean each max bid is not disclosed to other buyers. But the auctioneer certainly knows it. And is apparently using it. – Mowzer Dec 18 '15 at 21:21
  • Correct the auctioneer knows the max bid. I am asking if that should be told to the bidders or not. I am not familiar with auctions and my first thought my first reaction would be that the max bid a bidder enters is not known to anyone including the auctioneer (similar to entering a password or credit card #, which when properly handled is encrypted and can't be read). Also what happens in the auctioneer tells the bidders it can't see/read the max bid even though it can't. – David C Dec 18 '15 at 21:39
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The way you describe it, the auction site is acting badly unethical, and nobody knowing about that practice would touch the site. If they act this way and don't state it clearly, I would assume that it is actually fraud.

The same effect could be achieved quite openly: Instead of calling something a "maximum bid" call it the "bid" and when someone bids $200, change the price to $200, for everyone to see.

On eBay, for example, the "maximum bid" feature is supposed to simulate a bidder at a real auction, who has just made a moderate bid; in his mind he may or may not have a higher number that he is willing to bid. But to detect that higher number, someone else must bid himself, and run the risk of winning the auction (if they only wanted to drive the price up but not paying).

In a physical auction, bidders who are not present may deposit bids with a person they trust, and that would actually be the auctioneer. The auctioneer will then do the actions that the bidder would do if he were present. So if I deposited a maximum bid of $300 with the auctioneer, the highest bid is $150 and nobody seems to be bidding, the auctioneer will bid $155 on my behalf, and the auction continues. The auctioneer could invent a $295 bid and than bid $300 on my behalf, but if word gets out, he won't get deposited bids anymore.

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The most likely explanation for this is that $100 (and possibly $200) is less than the reserve price. Both on-line and real-life auctions usually start the bidding some way below the reserve. In real life, I have seen an auctioneer bid against a bidder on the floor - sometimes they are bidding on behalf of a bidder who has left a maximum bid with the auctioneer, but usually it is because the bid is below the reserve (the auctioneer will stop bidding when the reserve is met).

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