There's nothing to stop them from shilling. In fact, shill bidders help E-bay. The higher the item goes for, the more fees E-bay gets to collect. They have recently made it easier for shillers by hiding bidders' identities. E-bay claims that this is to protect bidders, but I can't see what bidders are being protected from. I, and many others on the E-bay forums, believe that E-bay is giving some protection to the shillers this way, naughty naughty.

The following is suspect behaviour: Another bidder with a low feedback score starts bidding after you, and they have only bid on the seller's items in the past. If the shill account wins the auction, you receive a second chance offer (as you have).
Your situation does sound rather suspicious. Have you checked to see if the other bidder has bid on only this seller's auctions?
You can report shill bidders, with varying effect (to E-bay's credit, they do act on the more prevalent shillers):
Click 'report this listing' at the bottom of the listing page.
Chose fraudulent listings then shill bidding.
Add a note to say which bidder you think is a shill bidder.
I'm not saying that the guy you're buying from is definitely a shiller (I haven't even seen the auction you're on about), only saying that it sounds suspicious. Good luck!
Oh, and stop driving up the auction prices!
I should be the only one bidding on LotR (just kidding of course)!
