While auctions definitely have a great number of advantages for both buyers and sellers, these advantages can be reduced significantly by unethical behavior by participants. This type of behavior is usually called collusion because it involves a secret agreement between multiple individuals to circumvent the rules for their own gain. All auctions are vulnerable to collusion to some degree and only by understanding the possible methods of “rigging” the auction can one hope to beat the unethical bidders and sellers at their own game.
In most cases of collusion, the seller is the one who is most hurt by the unethical practices. One example are bidding rings which consist of several people who are all interested in purchasing an item but who make an agreement not to outbid one another, which would drive the price up for all of them. Instead, one bidder from the ring is chosen to be the winner. After the close of the auction, the winner sells item off among the ring and earns back the amount he initially paid. The idea of the ring is that through their agreement not to outbid each other, they will be keeping the price low and thus the seller earns less for his item.
Generally, rings are made up of bidders who have specific information about the value of what is being sold. This knowledge gives them an advantage over other bidders and also means that they are willing to pay more for the item, even though when they are successful they end up getting a good deal at the seller's expense.
Online auctions are not immune to the problems of rings, although theoretically it should be less of a problem. The basic idea is that when more bidders are involved in an auction the changes of collusion of this type being effective is minimized. After all, it would be hard to imagine all of the bidders being involved in the same ring. Online auctions typically have more active participants than traditional, in-person auctions so rings are not as common or as effective.
However, even though rings may not be a major area of collusion in online auctions, there is still a method that can be easily used to manipulate the outcome of the auction in favor of the seller. In this method, the seller will usually work with one or more individuals to drive up the price of the item. For example, the seller may be working with Bidder A and Bidder B but not with Bidder C. Bidder C bids $50, then Bidder A bids $75 and Bidder B bids $100. Bidder C wants to win so he bids $125. This back and forth bidding can go on for as long as the auction lasts or until the fake bidders predict Bidder C will give up. When it works successfully, Bidders A and B will stop at a point that maximizes profits for the seller but that doesn't cause Bidder C to get out of the game. Generally, Bidder C will feel a tremendous sense of accomplishment for winning without realizing that he could have gotten the item for much less.
This type of collusion is difficult to stop in online auctions since all identities are usually kept secret, so if the seller and several of the bidders do have a connection, it is unlikely that anyone else involved would be aware of it. Plus, since the payment and shipment of the items is handled exclusively by the seller and the winning bidder, if they estimate wrong and end up winning the item, they can simply start a new auction using the same item and no one will be any wiser.
Even though all auction types are susceptible to collusion, some are more vulnerable than others. English auctions, for example, are more likely to be affected because it is easier for both rings and for planted bidders to do their jobs. On the other hand, Dutch auctions have normally been less likely targets of this type of behavior. It is more difficult to predict what the other bidders are going to do and when the auction is going to end. Also, sellers cannot effectively plant bidders to raise the bids since the bidder who accepts the highest price is always the winner. Despite the probability of collusion, sellers and bidders should never underestimate the creativity and cleverness of unethical individuals.