In its second-largest acquisition, Amazon buys the company for $970 million.
As if eBay didn’t have enough to worry about with antitrust investigations and people selling fake merchandise, now the FBI is investigating shill bidding on the San Jose, Calif.-based auction giant’s site. The investigation comes after a Sacramento lawyer placed a 25-cent bid on a painting. Bidding skyrocketed to more than $135,000 amid speculation the painting might be an original Richard Diebenkorn, a renowned California artist.
Self-bidding, or shill bidding, is illegal on federal statutes of mail and wire fraud and is also against eBay’s rules. But in reality it is difficult, if not impossible, to catch. There is very little to stop people from registering numerous times under different names and even less to do to stop associates of a seller from bidding on an item to jack up the price.
“There are a couple of things auctions can do to prevent this,” says Andrew Schwartz, senior analyst at Cambridge, Mass.-based Mainspring Communications Inc. “One way is to improve the registration process and make sure the person’s ID is confirmed.”
Seattle-based Amazon.com’s auction site reports having been able to minimize shill bidding by requiring buyers and sellers to submit credit card numbers. eBay only requires the seller’s credit card number. “We make it difficult to replicate accounts,” says Jeff Blackburn, general manager of Amazon.com auctions. “That doesn’t mean some people still don’t try and get around it.”
Both also have proprietary “shill hunter” software that can sometimes determine whether or not shill bidding is going on. However, eBay and Amazon would not say how the software works.
Retailers would be wise to have an individual’s identity verified by a third party, says Gina Paglucia Morrison, a senior analyst at Mainspring. “However, this would add cost and time,” she says.
Mainspring has been studying the auction model and Morrison and Schwartz say the best consumer-to-consumer business model might be a descending auction where the seller makes a bid and then drops the price at specific time where a buyer can jump in. “You don’t get the shill bids in this auction but you don’t get the excitement,” says Schwartz. “People like the entertainment factor of the eBay model.”