Shill Bidding and the Online Auction Industry

eBay's Setback Becomes Another Site's Slogan

Two downsides of mass-market online auctions reared their dreaded heads in an incident on eBay this spring: shill bidding and questionable authenticity.

This widely publicized, alleged fraud, however, hardly seems to have affected the industry.

Rather, according to spokesman Kevin Pursglove, "We have just released the details of another very successful quarter: Gross merchandise, registered users and the number of items listed in the last quarter continue to increase." eBay remains the largest online auction site, followed by amazon.com and Yahoo, according to Auctionwatch.com.

Meanwhile, online auction sites that focus exclusively on consigning fine art, such as artnet.com and ewolfs.com, have moved to distance themselves from the two-party system embodied by eBay.

If anything, this shilling incident - in which a seller placed a bid on his own item - and the ongoing FBI probe that has followed it have served as a wake-up call for eBay to reassure users of its reliability. The sale of a "great big wild abstract painting" bidders believed to be by Dutch artist Richard Diebenkorn was stopped on May 8 after climbing from 25 cents to $135,805, and the seller, Kenneth A. Walton, was suspended after eBay discovered he had bid on his own listing using an alias. Walton's bid, which he told the Associated Press he had made for a friend, was $4,500 and "had absolutely no effect on the eventual price," Walton said at the time.

"Once it was determined that the seller had shilled on the Diebenkorn-like painting, the listing was canceled, the user was suspended and eBay notified the appropriate authorities. Since that, eBay is cooperating fully with the FBI," Pursglove explained, noting, "The FBI has made it clear that it is investigating the acts of a single bidder and eBay is not a subject of the investigation."

The FBI may be focusing more on the issue of fakery than shilling: According to a story on Auctionwatch.com, KXTV News in Sacramento, Calif., an artist has testified before a grand jury that Walton hired him to paint two abstract paintings, and deliver them unsigned. (Story, "Update: Diebenkorn Painting Investigation" at http://www.auctionwatch.com/awdaily/dailynews/august00/2-081400.html.)

Pursglove says that eBay cannot comment on any FBI findings to date, or on the estimated length of the investigation. And, per FBI policy, they could not refer a reporter to the agent handling the case.

Response of Fine Art Sites

Rather than letting this incident also taint perceptions of authenticity and fair bidding practices on their sites, artnet.com and ewolfs.com, which consign works from sellers rather than allowing sellers to list directly on their sites, have seized the opportunity to differentiate their sites from eBay.

Right after the Walton incident, a dealer consigned a real Diebenkorn painting on artnet.com. It sold at a record price, and the site decided to run a piece of text (under the heading "Our Vetting Procedure") to assure bidders that the site's staff of experts had authenticated the work, says Karen Amiel, vice president of content and promotions at artnet.

The fees charged for this type of auction service, which may otherwise be seen as a downside, are now being touted as a plus - for deterring shill bidding.

At artnet.com, a seller pays a five percent fee, and a buyer pays a 10 percent commission. At ewolfs.com, the commission is generally between 10 and 20 percent, says owner and CEO Michael Wolf.

"It's not a problem for dealers who are structured they way we are. Who wants to pay that kind of penalty?" Wolf asked rhetorically. "At eBay, there's really no [monetary] penalty for bidding on your own items."

Adds ewolfs.com's assistant director Bridget McWilliams, "I think it's harder on our site because if somebody is doing that, they don't have a crystal ball, they're going to buy their own thing back and have to pay for it."

Of shilling, Wolf contends, "I think it's completely overblown in terms of its negative importance and in terms of statistics." On his site, he believes that "It's just not been a problem at all."

It's all about controlling the sales, McWilliams says, noting, "The number of sellers you have, that's the number of variables you have."

Amiel agrees.

"I think we have a more controlled universe than the eBay model," says Amiel. "I think that the division in the business model occurs when on one side you have sites like ours who deal with a network of reputable dealers, then you have the other side, such as eBay, which is consumer to consumer."

In the consumer-to-consumer business model, "you've eliminated the controls on the buying side and the controls on the vetting side," Amiel notes. When a site is modeled after a traditional auction house (as artnet.com is) or grows out of one (as ewolfs.com did), "It doesn't mean that [shilling] can't happen, but it's less likely," she says.

Even if shilling isn't seen as a major problem there, artnet.com tries to prevent shilling in several ways. The site lists all the bidders for each item on each lot page, and its staff monitors each auction to watch for "unusual activity." And its sellers' contracts contain language that forbids sellers from bidding on their own lots - "that's another layer" of prevention, Amiel says.

eBay Stands Its Ground

Even if the task is infinitely more complex, eBay's position is that it "has no tolerance for fraud and that includes shilling," according to Pursglove. "Though shill bidding may be a relatively small occurrence it is clearly against eBay policy and we believe it may be a felony under federal law."

Any bidder can establish a pre-determined maximum (bid proxy) or stop bidding manually at any time on eBay, he acknowledges. Still, shilling, says Pursglove, is considered a problem because "the integrity of the bidding process is challenged if a bidder believes the price of item has increased by an organized effort to drive up the price."

In the site's ongoing efforts to combat fraud - which include new technology, improved user identification and continuing user education - they made a startling discovery: "We have found that a good number of users who shill were not aware that it is against eBay policy or a possible violation of law." This may have been the case with Walton.

Also, Pursglove says eBay developed the industry's first shill bidding detection tool in early 1999 to analyze bidding patterns over multiple auctions, and was also an industry pioneer in the "Trust & Safety" area; the site employs approximately 250 people to focus on such issues.

Pursglove describes eBay's SafeHarbor (http://pages.ebay.com/help/community/index.html) department as "a full-service customer support and educational resource for users to educate themselves about safe trading on eBay and elsewhere on the Internet." He says the services of this team include tips for new users, links to the National Consumer's League, insurance and authentication. It is staffed around the clock, seven days a week.

Within particular auctions, eBay users have access to bidding activity and information to helps them identify and detect shilling, Pursglove says. In addition, he says, "Over the past year we have introduced a number of policies that help us better identify our users, including a credit card or 'ID Verify' requirement for sellers."

And sometimes it just takes a buyer's sharp eye to uncover fraud. According to the Auctionwatch story, a buyer who purchased a fake from Walton on eBay noticed that he still had one of Walton's many usernames in his feedback area, and it was still active. He informed eBay, which promptly unregistered it.