The Winner's Curse, Reserve Prices, and Endogenous Entry: Empirical Insights from eBay Auctions

Abstract

Online auctions have recently gained widespread popularity and are one of the most successful forms of electronic commerce. We examine a dataset of eBay coin auctions to explore features of online bidding and selling behavior. We address three main issues. First, we measure the extent of the winner's curse. We find that for a representative auction in our sample, a bidder's expected profits fall by 3.2 percent when the expected number of bidders increases by one. Second, we document that costly entry is a key component in understanding observed bidding behavior. For a representative auction in our sample, a bidder requires $3.20 of expected profit to enter the auction. Third, we study the seller's choice of reserve prices. We find that items with higher book value tend to be sold using a secret as opposed to posted reserve price with a low minimum bid. We find that this is, to a first approximation, consistent with maximizing behavior. We also develop new techniques for structurally estimating common value auction models.

Web crawling and filtering for on-line auctions from a social network perspective

“…Lucking-Reiley (2000) and Bajari and Hortacsu (2003) studied price determination by bid history on http://www.eBay.com. Bapna et al (2004) used bid histories to study the bid strategies of http://www.uBid.com.…”

“…Dellarocas (2001) analyzed the trust in the reputation mechanism of buyers and sellers on http://www.eBay.com. Bajari and Hortacsu (2003) and Borle et al (2005) compared the bid strategies of general value products and private value products on http://www.eBay.com. Jank and Shmueli (2005) studied price dynamics and evolution on http://www.eBay.com.…”

“…The on-line auction is one of the most successful types of electronic marketplace (Bajari and Hortacsu 2003). Over 10 million items can be found daily for sale on online auction sites like eBay, Amazon, and Yahoo.…”

Designing sniping agents

“…Among many, three are consistently being observed in many prior studies (Table 1): starting price, reserve price and auction duration. For instance LuckingReiley (2000), as well as Bajari and Hortacsu (2003), developed an analytical model of the endogenous entry in a single-item eBay coin auction and observed that starting price strongly affects participation. While a low starting price tends to attract more bidders, sellers could suffer a lower closing price.…”

Analysis of the distribution of the number of bidders in construction contract auctions

“…Since then, a compromise solution has been to consider the number of bidders as a purely stochastic variable in experimental settings (McAfee & McMillan, 1987) or as a fixed value in Game and Auction theory (Harstad et al, 1990), although quite surprisingly the Poisson model has endured since the very first and celebrated compilation of auction and bidding models from Stark and Rothkopf (1979) and Engelbrecht-Wiggans (1980) to modern and current online auctions (Bajari & Hortacsu, 2003).…”