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The Sealed-Bid Abstraction in Online Auctions

Robert Zeithammer

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

Christopher Adams

Federal Trade Commission - Bureau of Economics

December 6, 2009

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.

Number of Pages in PDF File: 50

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

JEL Classification: D44

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Date posted: November 8, 2007 ; Last revised: April 1, 2010

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

Contact Information

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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References:  31
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