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.
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