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Second-price sealed bid auctions on EBAY

https://www.stat.berkeley.edu/~aldous/Research/Ugrad/selene_xu.pdf

 

The examined article researched auction theory in relation to auctions which occurred on the EBAY web marketplace platform. Specifically, the study examined second price sealed bid auctions on the EBAY platform. There is a brief discussion of second price auctions and the fact that bidding true value is a dominant strategy, in theory. EBAY employees this auction system so a study was conducted to see if consumers would actually bid their true value. This means that a winning bid should not exceed the market value of a particular object. For this study, the researchers examined Nike dunks shoes. This item was chosen for a few reasons. First, it has a value that is relatively constant over time. In addition, information about the shoes such as release dates and market prices are both readily available to both consumers and researchers. Third, there are multiple sellers for the product so data can be collected at multiple points. Finally, as the item is normal, it is predicted that consumer habits surrounding it should be normal and rational. In this study, multiple instances where the shoes were auctioned were examined and market prices were researched in each instance to determine how their value compared to the winning bid for the auction. There were several assumptions that went into the study which are similar to the ones we examined in class. For instance, it is assumed that consumers have perfect information about the market and they use it. Additionally, the payoff to a consumer is the difference between their value on an object and how much they pay for an object. The final assumption is that Ebay’s system functions perfectly as a sealed-bid second price option. The hypothesis was that the total amount paid, including shipping cost, in a majority of instances should not exceed the market value of the object. In the study, it was found that 48.3% of auctions overbidding occured. This means that consumers could have gotten the product at a lower price if they had just gone elsewhere to purchase the product and not participated in the auction. Statistical analysis on the data also showed that this case of overbidding could not be attributed to randomness within the data. The data was analyzed again except without including shipping cost and the amount of overbidding was found to be 15%. Again, this percent could not be explained away simply by variation within the sample. Looking back at the study, it is interesting that while a majority of people still pay below the market value, there are some people who will pay more than market value for a product. This was attributed to a “winning mentality” which states that some people gain utility from winning an auction in addition to getting the product. It was also noted that consumers may not operate in the assumed “perfect” environment and usually people do not take all information available to them into consideration.

 

This study relates directly to the topic of auctions within the course. It gives a good look at one instance of how businesses use auctions in order to price their products. This was an interesting case as it looked at a slight variation of the second-price sealed bid auction. There was variation as consumers could bid multiple times, unlike in the typical second-price sealed bid auction. This study also gave a very interesting look at how the behavior of consumers should be taken into account and this behavior can be applied to any type of auction. Even when consumers have a wellspring of information accessible to them, they may choose not to use it. This was evident in the study as there was overbidding. People could have simply looked elsewhere rather than paying above market value. Another interesting piece was the psychology behind winning an auction, which we did not discuss in class. In all examples of auctions within the class we assume that the only payoff in an auction is a consumers difference between value and amount paid. In reality, there are other factors, such as winning, which consumers may value in addition to the product in itself. Overall, the study gave a good look at how auctions work in real life and the considerations which must be made when running an auction in a less than perfect environment.

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