Forward-Looking Bidding in Online Auctions. - The University of ...

Internet auction sites like eBay are increasingly being used to sell mass-produced consumerdurables: the largest eBay categories in dollar terms are: cars, consumer electronics, computers,clothing/accessories, and books/movies/music (2004 company report). Since the ending times ofthe individual auctions are not synchronized, each of these markets evolves as a sequence,allowing bidders to focus on the auction that will end first, while accounting for the fact thatthere will be other auctions later. Because online auctions are usually listed for several daysbefore concluding, detailed information about what and when will be sold in the near future isavailable to bidders. Two important questions thus arise, namely how should rational consumersinterested in buying just one unit of the good use such information in forming their bids, andwhether eBay bidders actually use the information accordingly. To answer these questions, thispaper develops a new model of equilibrium bidding in a very long sequence of auctions, andprovides empirical evidence of the model’s relevance to actual behavior of eBay bidders.The model assumes that each product-category is horizontally differentiated into severaltypes of goods, with each bidder having a unit demand for only one type of the good. Forexample, a consumer may be shopping for one DVD of her favorite movie, or for one unit of aspecific brand and model of an MP3-player. Each bidder therefore faces a tradeoff betweenwinning now and winning later, arising from the fact that the individual desired units are perfectsubstitutes: the winner of each auction exits the marketplace and hence foregoes the expectedsurplus from participating in future auctions that also sell her desired good, possibly for a lowerprice. The future expected surplus foregone by the current winner is an opportunity cost ofwinning now, and rational forward-looking bidders should reduce their bids relative to themyopic bidding strategy that would be optimal in the absence of future auctions selling thedesired type of good.3