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When Rational Sellers Face Nonrational Buyers: Evidence from Herding on eBay

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Author Info

  • Uri Simonsohn

    ()
    (Rady School of Management, University of California, San Diego, La Jolla, California 92093)

  • Dan Ariely

    ()
    (The Fuqua School of Business, Duke University, Durham, North Carolina 27708)

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    Abstract

    People 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.

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    File URL: http://dx.doi.org/10.1287/mnsc.1080.0881
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 54 (2008)
    Issue (Month): 9 (September)
    Pages: 1624-1637

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    Handle: RePEc:inm:ormnsc:v:54:y:2008:i:9:p:1624-1637

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    Related research

    Keywords: herding; auctions; biases; rationality; industrial organization;

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    Cited by:
    1. Philippe Jehiel & Laurent Lamy, 2011. "Absolute auctions and secret reserve prices: Why are they used?," Levine's Working Paper Archive 786969000000000316, David K. Levine.
    2. Egebark, Johan & Ekström, Mathias, 2011. "Like What You Like or Like What Others Like? Conformity and Peer Effects on Facebook," Working Paper Series 886, Research Institute of Industrial Economics.
    3. Ulrike Malmendier & Young Han Lee, 2011. "The Bidder's Curse," American Economic Review, American Economic Association, vol. 101(2), pages 749-87, April.
    4. Liu, Kang Ernest & Shiu, Ji-Liang & Sun, Chia-Hung, 2013. "How different are consumers in Internet auction markets? Evidence from Japan and Taiwan," Japan and the World Economy, Elsevier, vol. 28(C), pages 1-12.
    5. Tim Grebe & Radosveta Ivanova-Stenzel & Sabine Kröger, 2009. "Buy-it-Now Prices in eBay Auctions-The Field in the Lab," Cahiers de recherche 0950, CIRPEE.
    6. Wedad Elmaghraby & Anandasivam Gopal & Ali Pilehvar, 2012. "Reference Prices and Bidder Heterogeneity in Secondary Market Online B2B Auctions," Working Papers 12-06, NET Institute, revised Sep 2012.
    7. Pownall, Rachel A.J. & Wolk, Leonard, 2013. "Bidding behavior and experience in internet auctions," European Economic Review, Elsevier, vol. 61(C), pages 14-27.

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