Advertising as a Signal in an Internet Auctions Market
José J. Canals-Cerda
Federal Reserve Bank of Philadelphia
October 5, 2006
In this paper we undertake an empirical study of advertising in an online auctions market, or, more precisely, advertising on eBay. The type of advertising that we consider works as follows: at the time of listing the item on eBay, sellers are offered the option of incurring an extra fee in return for having their product listed first when buyers search for specific items. Our empirical methodology combines a model of choice on the part of the seller as to whether or not to advertise with a novel model of demand in an auction market environment. Because we explicitly model the process of arrival of new bidders, we can estimate the effect of advertising on the number of bidders, the distribution of bidders' valuations, and the final selling price. Using the structural model, we can also measure the effect of this form of advertising on the revenues of the seller and the market intermediary, as well as its effect on consumer surplus. Our results indicate that advertising in this market represents a signal of quality and facilitates the match between buyers and sellers. Accordingly, revenues for sellers and the market intermediary increase, and interestingly buyer surplus increases as well.
Number of Pages in PDF File: 54
Keywords: Advertising, English Auctions, Internet markets, Structural Estimation
JEL Classification: C51, C72, D44, L11, L14working papers series
Date posted: October 6, 2006
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