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Second-Chance Offers and Buyer Reputation: Theory and Evidence on Auctions with Default

Author

Listed:
  • Engelmann, Dirk

    (HU Berlin)

  • Frank, Jeff

    (Royal Holloway, University of London)

  • Koch, Alexander K.

    (Aarhus University)

  • Valente, Marieta

    (University of Minho)

Abstract

Winners in online auctions frequently fail to complete purchases. Major auction platforms therefore allow “second-chance” offers, where the runner-up bidder pays his own bid price, and they let sellers leave negative feedback on buyers who default. We show theoretically that (i) all else equal, the availability of second-chance offers reduces bids; (ii) sellers have no incentive to exclude bidders, even if they are nearly certain to default; (iii) buyer reputation systems reward bidders with a reputation for defaulting, counter to the idea of deterring such behavior. Our auction experiments support these predictions and provide insights on their practical relevance.

Suggested Citation

  • Engelmann, Dirk & Frank, Jeff & Koch, Alexander K. & Valente, Marieta, 2020. "Second-Chance Offers and Buyer Reputation: Theory and Evidence on Auctions with Default," Rationality and Competition Discussion Paper Series 237, CRC TRR 190 Rationality and Competition.
    • Handle: RePEc:rco:dpaper:237
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    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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