Second-guessing what other bidders are thinking is an especially serious problem in an English auction, such as eBay's, in which the price keeps rising until all bidders but one drop out. To signal its presence, it ended the dollar amounts of its bids in 483, which spells GTE on the telephone keypad. When other bidders realized that they could beat GTE in those markets only by overpaying, they dropped out early, handing GTE a bargain and reducing the government's auction revenue. As that case shows, auctions don't work well when bidders differ in their ability to pay and can see what each other is doing. They feared owning the club would give BSkyB an extra incentive to acquire rights to televise games of the league to which Manchester United belongs, thus frightening off other bidders and depressing the value of the rights auction.
Collusion is the other inherent flaw of auctions.
Because so much price information is on public display, it's easier for either buyers or sellers to collude in an auction than when transactions are done one on one. On eBay, for instance, one illegal trick is for two bidders to team up. One enters a low bid and the other then enters a high bid that no one can top. Afterward, the high bidder withdraws his bid and the sale automatically goes to his low-bidding buddy. Sellers can cheat, too, by using shills to enter fake bids and drive up the price.