The Role Of Product Quality Information, Market State Information And Transaction Costs In Electronic Auctions

Electronic auctions have rapidly increased in popularity, but the consequences of switching to an electronic auction are unclear. In part this is because multiple changes occur at the same time so one can only observe the combined effect of these changes and not the effect of each separate change. For instance, electronic bidders face lower transaction costs, but also have less information about product quality and about the state of the market such as the number of bidders. In this paper, we report a study of bidding behavior at a large Dutch flower auction in which we are able to separate some of these effects. We compare electronic bidders with traditional bidders and when correcting for quality differences and seasonal effects, we find that they to bid lower on average than traditional buyers, as predicted by Bakos (1991, 1997). The electronic bidders were divided in two subgroups, internal bidders and external bidders. The external bidders had less product quality information and market state information than the internal bidders. This led the external bidders to not only bid significantly higher than the internal bidders, but in fact as high as the traditional bidders. Both these effects run counter to theoretical predictions and some possible alternative explanations are offered. In general, it highlights the importance of focusing the information flows that occur in a market.