EBay Or Not To eBay?
From the Briefcase: Research produced by America's Best Business Schools
Zeithammer finds that the behavior of eBay bidders most closely matches this "most sophisticated" model of bidding behavior, in which bidders consider not only the overall number of upcoming products, but also their own personal preferences for the specific products listed.
EBay provided Zeithammer with data on auctions for MP3 players and movies on DVD. Each dataset contained all submitted bids in each recorded auction, and information about each listing. The data included all proxy bids made, including the winning bid. The MP3 player dataset included all auctions for the top 30 models of MP3 players during a four-month period in early 2001. The DVD dataset incorporated all auctions for 30 popular movie titles in October 2002.
The data analysis focused on prices (second-highest bids) and highest bids rather than all recorded bids, because it is only possible to observe a bid on eBay if it is higher than all other bids already submitted, and the top two bids are always observed. A key element of the analysis was determining how prices for an item changed as a function of the next five auctions in the sequence, which involved re-creating the order of items that bidders observed at any given time. The most important control-variable was the number of bidders per auction, because more auctions typically result in fewer bidders per auction and hence lower prices. Therefore, the statistical model estimates the effect of more auctions on prices while keeping the number of bidders per auction the same.
Zeithammer found that in both datasets, bidders seemed to engage in at least one form of forward-seeing bidding. In the DVD dataset, if the same title was offered in the next five auctions, bids were lower. The average eBay price of DVDs was about $10 at the time of the study. Having the same movie offered in the immediately next auction led to price drops of approximately 72 cents, and availability anywhere in the next five auctions led to a 31-cent decrease (controlling for the number of bidders).
Bidding on MP3 players also was consistent with theory. A doubling of the number of auctions ending in the next hour resulted in prices dropping by approximately 2 percent. The specific information about upcoming players' brands and models had a more substantial effect on the bids for high-end MP3 players: for MP3 players that cost roughly $180, having the same brand and model available within the next five auctions reduced prices by $8 (4.4 percent) on average, and by $10 (5.6 percent) when the same product was immediately available in the next auction. Delaying the next auction of the same product by a mere hour increased the bid price by more than $2.
As for how these findings affect eBay sellers, Zeithammer notes, "Sellers would ideally like to sell as many items as possible, but the more items they list, the more prices will drop per item; not only will there be fewer bidders per auction, but all bidders will bid less than they would in the absence of the additional items. Sellers should therefore space their auctions apart and not sell the same item back to back."
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