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Expectation, Disappointment, and Exit: Evidence on Reference Point Formation from an Online Marketplace

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  • Matthew Backus
  • Thomas Blake
  • Dimitriy Masterov
  • Steven Tadelis

Abstract

We study disappointment and platform exit among new bidders in an online auction marketplace. In particular, we study a hybrid auction format with a “Buy-It-Now” option, which, when executed, will abruptly end the auction and cancel any standing bids. When this happens, if the formerly leading bidder is new to the platform, then they are 6 percentage points more likely to exit the marketplace for every additional day they spent in the lead. This is rationalized by disappointment-averse bidders with outside options and rational expectations about the likelihood of winning. Our explanation is validated by three ancillary predictions: when expectations are lowered by higher competing bids, there is no effect; sensitivity of exit is declining in prior experience; and, for bidders who do not exit, time in the lead during the first experience predicts a subsequent preference for fixed-price, rather than auction, listings.

Suggested Citation

  • Matthew Backus & Thomas Blake & Dimitriy Masterov & Steven Tadelis, 2022. "Expectation, Disappointment, and Exit: Evidence on Reference Point Formation from an Online Marketplace," Journal of the European Economic Association, European Economic Association, vol. 20(1), pages 116-149.
  • Handle: RePEc:oup:jeurec:v:20:y:2022:i:1:p:116-149.
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    File URL: http://hdl.handle.net/10.1093/jeea/jvab033
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    Cited by:

    1. Adhvaryu, Achyuta & Nyshadham, Anant & Xu, Huayu, 2023. "Hostel takeover: Living conditions, reference dependence, and the well-being of migrant workers," Journal of Public Economics, Elsevier, vol. 226(C).
    2. Gagnon-Bartsch, Tristan & Bushong, Benjamin, 2022. "Learning with misattribution of reference dependence," Journal of Economic Theory, Elsevier, vol. 203(C).

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