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The Sealed-Bid Abstraction in Online Auctions

50 Pages Posted: 8 Nov 2007 Last revised: 1 Apr 2010

Robert Zeithammer

University of California, Los Angeles (UCLA) - Anderson School of Management

Christopher Adams

Federal Trade Commission - Bureau of Economics

Date Written: December 6, 2009

Abstract

This paper presents five empirical tests of the popular modeling abstraction that assumes bids from online auctions with proxy bidding can be analyzed “as if” they were bids from a second price sealed-bid auction. The tests rely on observations of the magnitudes and timings of the top two proxy bids, with the different tests stemming from different regularity assumptions about the underlying distribution of valuation signals. We apply the tests to data from three eBay markets - MP3 players, DVDs, and used cars - and we reject the sealed-bid abstraction in all three datasets. A closer examination of these rejections suggests they are driven by less experienced bidders. This consistent rejection casts doubt on several existing theories of online auction behavior and suggests some demand estimates based on the abstraction can be biased. To assess the direction and magnitude of this bias, we propose and estimate a new model in which some bidders conform to the abstraction while other bidders bid in a reactive fashion. Since reactive bidding can be at least partially detected from the data, we are able to estimate the underlying distribution of demand and compare it to what the sealed-bid abstraction implies. We find that our proposed model fits the data better, and our demand estimates reveal a large potential downward bias were we to assume the second-price sealed-bid model instead.

Keywords: eBay, empirical auctions, sealed bidding, online auction

JEL Classification: D44

Suggested Citation

Zeithammer, Robert and Adams, Christopher, The Sealed-Bid Abstraction in Online Auctions (December 6, 2009). Available at SSRN: https://ssrn.com/abstract=1028063 or http://dx.doi.org/10.2139/ssrn.1028063

Robert Zeithammer (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Christopher Adams

Federal Trade Commission - Bureau of Economics ( email )

601 Pennsylvania Avenue, NW
Rm. 4210
Washington, DC 20580
United States
202-326-2592 (Phone)
202-326-3443 (Fax)

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