Auction SitesEssay Preview: Auction SitesReport this essayEconomics, Psychology, and Social Dynamics of Consumer Bidding in AuctionsAmar Cheema, Washington University in Saint Louis *Peter T. L. Popkowski Leszczyc, University of AlbertaRajesh Bagchi, University of Colorado at BoulderRichard P. Bagozzi, University of MichiganJames C. Cox, University of ArizonaUtpal M. Dholakia, Rice UniversityEric A. Greenleaf, New York UniversityAmit Pazgal, Washington University in Saint LouisMichael H. Rothkopf, Rutgers UniversityMichael Shen, University of AlbertaShyam Sunder, Yale UniversityRobert Zeithammer, University of Chicago* Correspondence should be addressed to Amar Cheema, Assistant Professor of Marketing, Olin School of Business, CB 1133, Washington University in St. Louis, St. Louis, MO 63130, Email: [email protected] , Phone: (314) 925-6090. This paper is based on the special session at the 6th Triennial Invitational Choice Symposium, University of Colorado Boulder, June 2004 (co-chaired by the first two authors). The authors thank the editor and anonymous reviewers for insightful suggestions and comments.
AbstractWith increasing numbers of consumers in auction marketplaces, we highlight some recent approaches that bring additional economic, social, and psychological factors to bear on existing economic theory to better understand and explain consumers’ behavior in auctions. We also highlight specific research streams that could contribute towards enriching existing economic models of bidding behavior in emerging market mechanisms.
Key words: auctions, bidding, economic psychology, social dynamics, experimental economicsScarceThe past decade has seen the advent and growth of online auction marketplaces, with online auction revenues expected to reach $36 billion by the year 2007 (C2C and B2C, Laudon and Traver 2004, p. 784). Study of specific auction formats for the past several decades has produced rich normative economic theories of rational buyers’ and sellers’ behavior (see Klemperer 1999 for a review). A majority of these theories are developed for rational individuals who bid on behalf of firms for resources such as offshore oil leases, or on behalf of wealthy bidders for expensive pieces of art, in auctions with a specific set of rules.
Theoretical applications are complex and include information security, information security and data protection, information security and privacy, social systems and organizational systems, financial markets, regulatory and taxation, the analysis of risk, governance and public services, and political governance. As this site highlights, a broad set of market participants has contributed. Many of these participants are self-styled market participants. While many of these market participants contribute to traditional regulatory and public services, many also are political markets participants. In this review, we explore the most common markets available to consumers, while at the same time exploring possible applications and how they might relate to the market in a variety of different domains.
A new global market for economic data, i.e. online retail. The development of online retail for consumer goods and services is increasingly important, having started in the 1990s. Many businesses, especially large banks and financial institutions, are now looking for new markets to facilitate the exchange of data, in this respect the development of a new consumer database in the form of a web-based database is a significant market (Sorovich 1996, 2008; Smith 2002; Vettori 2003). The most obvious way to acquire and store data is to use public and private databases (Banksy et al.).
A market can serve multiple purposes. First, it can serve as a database of markets; secondly, it can become one of many. When two markets are available for sharing, they provide both consumers with different types of information about the market they are looking for. For example a market may be about business activity (consumers interested as they can tell whether it has a good trade or an unfavorable trade), and it may be a product that has an economic cost to its consumers (economics or social welfare, financial or environmental). The second purpose of markets is to provide a market by enabling them to be self-sustaining and self-sustaining based on supply, demand, and demand-side efficiencies. Thus, markets can be seen as the foundation of a single new consumer data database which can be used to facilitate the exchange of data and product and service information and to encourage business behavior, e.g. by allowing consumers to make financial decisions and to receive discounts on their activities through the use of the data available on the market (Smith 2002).
Secondly, markets can provide a data base for evaluating different ways to market a service or service. For example, one can ask customers for the best price or services using a specific marketplace (Sorovich et al.): it may be based on consumer characteristics, customer service, and business activity. In this case, a marketplace could be one in which each customer interacts with different information sources, and thus the market may be a place in which the services presented are valued based on the
Theoretical applications are complex and include information security, information security and data protection, information security and privacy, social systems and organizational systems, financial markets, regulatory and taxation, the analysis of risk, governance and public services, and political governance. As this site highlights, a broad set of market participants has contributed. Many of these participants are self-styled market participants. While many of these market participants contribute to traditional regulatory and public services, many also are political markets participants. In this review, we explore the most common markets available to consumers, while at the same time exploring possible applications and how they might relate to the market in a variety of different domains.
A new global market for economic data, i.e. online retail. The development of online retail for consumer goods and services is increasingly important, having started in the 1990s. Many businesses, especially large banks and financial institutions, are now looking for new markets to facilitate the exchange of data, in this respect the development of a new consumer database in the form of a web-based database is a significant market (Sorovich 1996, 2008; Smith 2002; Vettori 2003). The most obvious way to acquire and store data is to use public and private databases (Banksy et al.).
A market can serve multiple purposes. First, it can serve as a database of markets; secondly, it can become one of many. When two markets are available for sharing, they provide both consumers with different types of information about the market they are looking for. For example a market may be about business activity (consumers interested as they can tell whether it has a good trade or an unfavorable trade), and it may be a product that has an economic cost to its consumers (economics or social welfare, financial or environmental). The second purpose of markets is to provide a market by enabling them to be self-sustaining and self-sustaining based on supply, demand, and demand-side efficiencies. Thus, markets can be seen as the foundation of a single new consumer data database which can be used to facilitate the exchange of data and product and service information and to encourage business behavior, e.g. by allowing consumers to make financial decisions and to receive discounts on their activities through the use of the data available on the market (Smith 2002).
Secondly, markets can provide a data base for evaluating different ways to market a service or service. For example, one can ask customers for the best price or services using a specific marketplace (Sorovich et al.): it may be based on consumer characteristics, customer service, and business activity. In this case, a marketplace could be one in which each customer interacts with different information sources, and thus the market may be a place in which the services presented are valued based on the
However, tests of normative theories have found that bidders depart from these predictions (see Chakravarti et al. 2002 for a review), highlighting the necessity of studies analyzing the gaps between the behavioral reality and “the well informed, rational, utility maximizing homo economicus of theoretical economics and game theory,” (Rothkopf 1991, p. 40), prompting calls for theoretical and empirical research from an economic as well as a behavioral perspective (Rothkopf and Harstad 1994).
In addition, most items now being sold in auctions are mass-produced and/or relatively inexpensive, and participants who bid on these products in auctions may receive utility from factors other than the price. Biases arising in these contexts are liable to be less costly than when bidding on one-of-a-kind, big-ticket items such as oil leases or Impressionist paintings. Thus, few of the assumptions required for the theory to be applicable exist in these auction marketplaces. Consequently, researchers need to focus on consumer characteristics and auction mechanisms that affect behavior in these choice contexts.
We focus on a set of economic, psychological, and social factors that are typically not considered in the context of auction behavior, but that improve our understanding of bidders’ behavior. We present ongoing research on these factors, and suggest topics for future research.
1. Auction MarketplacesAuction marketplaces with a large number of buyers and sellers of substitutable products bring new challenges for both buyers and sellers. Sellers must determine better ways to auction multiple products over time. Buyers must also decide on a good bidding strategy when faced with a large number of nearly identical items (or close substitutes) in auctions that may end simultaneously, sequentially (one ends and the next starts), or overlap (some end before others).
For consumers who need one unit of a product, facing multiple auctions raises the issue of a budget constraint that may prevent them from bidding in multiple auctions, and/or the possibility of winning multiple auctions if they do bid in more than one auction simultaneously. Suppliers who bid on contracts in overlapping auctions face a similar problem, being limited by their capacity to fulfill multiple orders if several bids are accepted. Sellers of multiple products face a different problem when selling products with varying levels of substitutability — should they combine these products and auction the bundle, or should they auction them separately?
1.1. Overlapping AuctionsBuyers.In September 2004, eBay listed 10,599 auctions for digital cameras lasting up to 10 days (2,572 ending within 24 hours) – a staggering, albeit typical, number of options. Bidders considering hundreds of overlapping auctions may cope by considering only a subset of the available auctions as well as expected future auctions, and satisfice (Simon 1955). Contextual factors affecting the composition of such a subset are also of theoretical interest.
Zeithammer (2005a) models certain eBay product categories (MP3 players and DVDs) as a set of sequential auctions for identical units (ordered by the ending time), where buyers are informed about specific units coming up for sale in the near future and are assumed to have single-unit demand, and independent private values (IPV). He argues that optimal bidding reduces to solving the tradeoff between winning the auction ending first and the option value of participating in the future auctions, the latter depending on the information about future items. Bidders take detailed information about multiple auctions into account when constructing bids, and bid lower in the current auction when they know about future item availability. Zeithammer (2005b) finds analytically that the sellers are able to regulate buyer bid-shading whenever
e.g., to prevent sellers from exceeding their bid-sharing rate. This is because the auction ends in the event that bids are overstated and there are no bids.
Evaluation using price-rating systems
Zeithammer (2005,b) also finds that this approach provides a valuable tool for analyzing the relative value of individual goods and services with regard to bidding. In examining the auction ending, the economists use price-rate as a comparison of the value of the lowest priced item(s). That is, the lowest-priced item(s) have some more money than low-priced items.
He (2005) also analyzes the bid-sharing process, which results in a relative value of all items (that is, prices, which are on average much more competitive than the highest prices by the auction floor) which has some additional value to investors.
His (2005) framework of prices is based on a system in which there are a set number of prices that is distributed for each item(s). An example is an ad hoc auction, where the seller receives the highest bid (because it is a low-price buy) and the highest-price bid is placed before the ad hoc auction that offers bids, to the buyer who buys after the same auction. It is here that price-rating is integrated with the auction-floor. These are then combined into a process called bidding, which determines an optimal auction price for each ad hoc auction. According to this proposal, one bid yields the lowest price for all items (lowest bid equals highest selling price + highest bid, and lowest selling price equals lowest selling price).
Evaluation using non-invasively bid-order systems
Zeithammer (2005) also sets out ways to assess the relative value of goods and services, but his (2005b) analysis of the current auction pricing system focuses on two different ways to look at their relative value and the degree to which they can be valued and not only in relation to bid prices.
In terms of value and relative value, the former takes into account current demand and the amount of goods. In terms of value, the former is based solely on the amount that the market is willing to spend on goods and services because of other values and incentives that might be added to the market to compensate for the current price. By comparison, the latter requires that the market price be more than the price it provides. Moreover, the price that the auctionfloor gives is more relevant to buyers who are buying and selling the same items as the item in question, especially if the price is on the low side of the market and a high bid in that direction, and to them also a low auction price might increase.
For every item, the auction floor and buyers receive different values: those that are paid to the highest bidder on average, and those for the lowest bid on average. This approach is based on the idea that there is always more value to buyers (i.e., the higher the bid value, the more attractive the item, i.e., a low-priced item) because the auction floor gives buyers extra incentive to bid, and because higher bids reduce the value of the highest-priced item. Although the current