When Rational Sellers Face Non-Rational Buyers: Evidence from Herding on eBay

Abstract

P eople often observe others' decisions before deciding themselves. Using eBay data for DVD auctions we explore the consequences of neglecting nonsalient information when making such inferences. We show that bidders herd into auctions with more existing bids, even if these are a signal of no-longer-available lower starting prices rather than of higher quality. Bidders bidding a given dollar amount are less likely to win low starting price auctions, and pay more for them when they do win. Experienced bidders are less likely to bid on low starting price auctions. Remarkably, the seller side of the market is in equilibrium, because expected revenues are nearly identical for high and low starting prices.

Learning from Seller Experiments in Online Markets

“…Lower start prices attract buyers who become committed to the auction and continue to bid aggressively as the price rises. Simonsohn and Ariely (2008) found that while lower start prices did not necessarily increase the price conditional on sale, they increased the price conditional on it rising above the higher start price -again consistent with the "bidding frenzy" theory. In contrast, other researchers (Kamins et al, 2004;Reiley, 2006;Lucking-Reiley et al, 2007) found that lower start prices generally led to lower prices conditional on sale, without testing the upper tail.…”

“…We show how the targeted variation created by seller experimentation can address a range of old and new questions about consumer behavior and auction design in internet markets. In particular, we use the data to quantify the price variability or dispersion for identical listings, to evaluate the hypothesis that eBay consumers engage in "excessive"bidding (e.g., Lee and Malmendier, 2011), to measure the e¤ect of auction reserve prices (Kamins et al, 2004;Ku et al, 2006;Reiley, 2006;Lucking-Reiley et al, 2007;Simonsohn and Ariely, 2008), to analyze the impact of "buy now" options in consumer auctions (Stadi…rd et al, 2004;Ackerberg et al, 2006;Anderson et al, 2008), and to assess whether consumers systematically underweight shipping fees (Tyan, 2005;Hossain and Morgan, 2006;Brown, Hossain and Morgan, 2010).…”

Herding behavior in online P2P lending: An empirical investigation

“…Their findings show that the download ranking of software products highly influences online users' choice of product. Herding on eBay has been studied by Simonsohn and Ariely (2007). They found that online bidders prefer auctions with more existing bids, even though they are non-diagnostic of quality, which means that non-rational herding occurs on eBay.…”

Search and herding effects in peer-to-peer lending: evidence from prosper.com

“…Simonsohn and Dan (2008) find an interesting equilibrium on eBay: bidders choose auctions with more bids, so sellers start the auction at lower prices to entice bidders. Cipriani and Guarino (2005) find contrarian behavior by agents in a laboratory financial market.…”