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Penny Auctions are Unpredictable

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  • Toomas Hinnosaar
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    Abstract

    I study an auction format called penny auctions. In these auctions, every bid increases the price by a small amount, but it is costly to place a bid. The auction ends if more than some predetermined amount of time has passed since the last bid. Outcomes of real penny auctions are surprising: even selling cash can give the seller an order of magnitude higher or lower revenue than the nominal value. Sometimes the winner of the auction pays very little compared to many of the losers at the same auction. The unexpected outcomes have led to the accusations that the penny auction sites are either scams or gambling or both. I propose a tractable model of penny auctions and show that the high variance of outcomes is a property of the auction format. Even absent of any randomization, the equilibria in penny auctions are close to lotteries from the buyers’ perspective.

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    Bibliographic Info

    Paper provided by Collegio Carlo Alberto in its series Carlo Alberto Notebooks with number 305.

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    Length: 28 pages
    Date of creation: 2013
    Date of revision:
    Handle: RePEc:cca:wpaper:305

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    Keywords: penny auction; Internet auctions; bid fees; gambling;

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    1. Baye, M.R. & Kovenock, D. & De Vries, C., 1992. "The All-Pay Auction with Complete Information," Papers 8-92-1, Pennsylvania State - Department of Economics.
    2. Di Gaetano, Luigi, 2011. "A model of descending auction with hidden starting price and endogenous price decrease," MPRA Paper 35773, University Library of Munich, Germany.
    3. Östling, Robert & Wang, Joseph Tao-yi & Chou, Eileen & Camerer, Colin F., 2007. "Testing Game Theory in the Field: Swedish LUPI Lottery Games," Working Paper Series in Economics and Finance 671, Stockholm School of Economics, revised 30 Oct 2007.
    4. Brennan C. Platt & Joseph Price & Henry Tappen, 2010. "Pay-to-Bid Auctions," NBER Working Papers 15695, National Bureau of Economic Research, Inc.
    5. Raviv, Yaron & Virag, Gabor, 2009. "Gambling by auctions," International Journal of Industrial Organization, Elsevier, vol. 27(3), pages 369-378, May.
    6. Rapoport, Amnon & Otsubo, Hironori & Kim, Bora & Stein, William E., 2007. "Unique bid auctions: Equilibrium solutions and experimental evidence," MPRA Paper 4185, University Library of Munich, Germany, revised 17 Jul 2007.
    7. Jacob K. Goeree & Emiel Maasland & Sander Onderstal & John L. Turner, 2005. "How (Not) to Raise Money," Journal of Political Economy, University of Chicago Press, vol. 113(4), pages 897-926, August.
    8. Andrea Gallice, 2012. "Price Reveal Auctions," Working papers 015, Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino.
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