EBay Or Not To eBay?
From the Briefcase: Research produced by America's Best Business Schools
Study: "Forward-looking Bidding in Online Auctions"
Authors: Robert Zeithammer (Chicago Graduate School of Business)
Status: Published in Journal of Marketing Research
Summary: What happens when the role of an auction changes from selling unique items at Sotheby's to driving large markets for consumer goods on eBay? A new study says consumers get craftier and craftier.
EBay began as a website auctioning Pez dispensers and other collectibles, but today it deals in a broad array of mass-produced consumer goods and big-ticket items, including houses and cars.
In such consumer-good categories, nearly identical products are sold within minutes of each other. Since the ending times of the individual auctions are not synchronized, each product market evolves as a sequence. This allows bidders to focus on the auction ending soonest, while also accounting for the fact that there will be other auctions later. Upcoming auctions are announced several days in advance, so information about the products to be sold in future auctions is readily available.
"Having information about future auctions changes how bidders should behave," says University of Chicago Graduate School of Business Prof. Robert Zeithammer. "Bidders should take the entire known set of auctions into account. If they lose the current auction, they can still bid in future auctions selling similar products, whereas in the Sotheby's world, if I lose at an auction for a unique Renoir painting, I go home empty-handed and my bidding is over."
In the study "Forward-looking Bidding in Online Auctions," Zeithammer addresses how rational bidders should use information about future auctions. He then studies how the behavior of real eBay bidders compares to the theoretical predictions.
In economic terms, the bidders in Zeithammer's model are "forward-looking" because they consider the future rather than focusing only on today. The innovation in Zeithammer's model is that his bidders are also "forward-seeing," because they take specific information about their future opportunities into account.
The model predicts that rational forward-seeing bidders will reduce their bids when there are more products sold in the near future, and they will reduce bids even more when the upcoming products are the same as the one being sold in the current auction.
"You shouldn't just look at one item and decide on the maximum you'll pay," says Zeithammer. "The more options you have and the better those options are for you, the more you should lowball your current bid. Be patient, and if you lose the auction, play again. On average you'll get the item you want for a lower price."
Using detailed data from eBay auctions for MP3 players and movies on DVD, Zeithammer finds that eBay bidders reduce their current bids when there are more upcoming auctions for substitutable items. In both product categories, bidders seem to take into account not only the general information like number of future products, but also the specifics of those future products.
Zeithammer estimates that this behavior results in prices that are 3 to 7 percent lower whenever the same item is available in the next five auctions, assuming the number of bidders per auction remains the same.
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