Consumer Surplus in Online Auctions

Abstract

Despite the growing research interest in Internet auctions, particularly those on eBay, little is known about quantifiable consumer surplus levels in such mechanisms. Using an ongoing novel field experiment that involves real bidders participating in real auctions, and voting with real dollars, we collect and examine a unique dataset to estimate consumer surplus in eBay auctions. The estimation procedure relies mainly on knowing the highest bid, which is not disclosed by eBay, but is available to us from our experiment. At the outset we assume a private value second-price sealed-bid auction setting, as well as a lack of alternative buying options within or outside eBay. Our analysis, based on a sample of 4514 eBay auctions, indicates that consumers extract a median surplus of at least $4 per eBay auction. This estimate is unbiased under the above assumptions, and otherwise it is a lower bound. The distribution of surplus is highly skewed given the diverse nature of the data. We find that eBay's auctions generate at least $7.05 billion in total consumer surplus in the year 2003 and may generate up to $7.68 billion if the private value sealed-bid assumption does not hold. We check for the validity of our assumptions and the robustness of our estimates using an additional dataset from 2005 and a randomly sampled validation dataset from eBay.

Keywords: eBay, sniping, highest bid, consumer surplus