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The Sealed-Bid Abstraction in Online Auctions

  • Robert Zeithammer

    ()

    (Anderson School of Management, University of California, Los Angeles, Los Angeles, California 90095)

  • Christopher Adams

    ()

    (Federal Trade Commission, Washington, DC 20580)

Registered author(s):

    This paper presents five empirical tests of the popular modeling abstraction that assumes bids from online auctions with proxy bidding can be analyzed "as if" they were bids from a second-price sealed-bid auction. The tests rely on observations of the magnitudes and timings of the top two proxy bids, with the different tests stemming from different regularity assumptions about the underlying distribution of valuation signals. We apply the tests to data from three eBay markets--MP3 players, DVDs, and used cars--and we reject the sealed-bid abstraction in all three data sets. A closer examination of these rejections suggests that they are driven by less experienced bidders. This consistent rejection casts doubt on several existing theories of online auction behavior and suggests some demand estimates based on the abstraction can be biased. To assess the direction and magnitude of this bias, we propose and estimate a new model in which some bidders conform to the abstraction while other bidders bid in a reactive fashion. Because reactive bidding can be at least partially detected from the data, we are able to estimate the underlying distribution of demand and compare it to what the sealed-bid abstraction implies. We find that our proposed model fits the data better, and our demand estimates reveal a large potential downward bias were we to assume the second-price sealed-bid model instead.

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    File URL: http://dx.doi.org/10.1287/mksc.1100.0561
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    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 29 (2010)
    Issue (Month): 6 (11-12)
    Pages: 964-987

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    Handle: RePEc:inm:ormksc:v:29:y:2010:i:6:p:964-987
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    1. Roth, Alvin & Ockenfels, Axel & Ariely, Dan, 2005. "An Experimental Analysis of Ending Rules in Internet Auctions," Scholarly Articles 2579649, Harvard University Department of Economics.
    2. John A. List, 2003. "Does Market Experience Eliminate Market Anomalies?," The Quarterly Journal of Economics, Oxford University Press, vol. 118(1), pages 41-71.
    3. Philip Haile, 2000. "Inference with an Incomplete Model of English Auctions," Econometric Society World Congress 2000 Contributed Papers 1546, Econometric Society.
    4. Ernst Fehr & Jean-Robert Tyran, 2005. "Individual Irrationality and Aggregate Outcomes," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 43-66, Fall.
    5. Athey,S. & Haile,P.A., 2000. "Identification of standard auction models," Working papers 13, Wisconsin Madison - Social Systems.
    6. Alvin E. Roth & Axel Ockenfels, . "Last-Minute Bidding and the Rules for Ending Second-Price Auctions: Evidence from eBay and Amazon Auctions on the Internet," Papers on Strategic Interaction 2002-32, Max Planck Institute of Economics, Strategic Interaction Group.
    7. Patrick Bajari & Ali Hortaçsu, 2004. "Economic Insights from Internet Auctions," Journal of Economic Literature, American Economic Association, vol. 42(2), pages 457-486, June.
    8. Eric T. Bradlow & Young-Hoon Park, 2007. "Bayesian Estimation of Bid Sequences in Internet Auctions Using a Generalized Record-Breaking Model," Marketing Science, INFORMS, vol. 26(2), pages 218-229, 03-04.
    9. Paul Resnick & Richard Zeckhauser & John Swanson & Kate Lockwood, 2006. "The value of reputation on eBay: A controlled experiment," Experimental Economics, Springer;Economic Science Association, vol. 9(2), pages 79-101, June.
    10. Adams, Christopher P., 2007. "Estimating demand from eBay prices," International Journal of Industrial Organization, Elsevier, vol. 25(6), pages 1213-1232, December.
    11. Bajari, Patrick & Hortacsu, Ali, 2003. " The Winner's Curse, Reserve Prices, and Endogenous Entry: Empirical Insights from eBay Auctions," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 329-55, Summer.
    12. Peters, Michael & Severinov, Sergei, 2005. "Internet Auctions with Many Traders," Microeconomics.ca working papers peters-05-03-30-03-06-03, Vancouver School of Economics, revised 23 Jan 2006.
    13. Tanjim Hossain, 2008. "Learning by bidding," RAND Journal of Economics, RAND Corporation, vol. 39(2), pages 509-529.
    14. Erik Brynjolfsson & Michael D. Smith, 2000. "Frictionless Commerce? A Comparison of Internet and Conventional Retailers," Management Science, INFORMS, vol. 46(4), pages 563-585, April.
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