Download this Paper Open PDF in Browser

How Reduced Search Costs and the Distribution of Bidder Participation Affect Auction Prices

Eric Overby, Karthik Kannan (2015) How Reduced Search Costs and the Distribution of Bidder Participation Affect Auction Prices. Management Science 61(6):1398-1420

37 Pages Posted: 26 Dec 2011 Last revised: 4 Jun 2016

Eric M. Overby

Georgia Institute of Technology

Karthik Natarajan Kannan

Purdue University

Date Written: July 17, 2014

Abstract

Electronic commerce allows bidders to find and participate in auctions regardless of location. This reduction in bidders’ search costs has important effects on bidders’ participation patterns and sellers’ revenue. The “demand expansion” effect occurs when reduced search costs allow bidders to participate in more auctions. The “demand distribution” effect occurs when reduced search costs allow bidders to distribute themselves more evenly across auctions. We focus on the latter effect by modeling when a more even distribution of bidder participation across auctions increases seller revenue. We apply our analytical insights to 65,718 sequential auctions (comprising over 10 million vehicles) in the wholesale used vehicle market. We show that reduced search costs can increase seller revenue by smoothing the distribution of bidder participation across auctions, even if the aggregate amount of bidder participation remains constant. This contributes new results to the auction theory literature and generates novel insights for sellers seeking increased revenue.

Keywords: buyer search costs, auctions, automotive, analytical modeling, empirical analysis

Suggested Citation

Overby, Eric M. and Kannan, Karthik Natarajan, How Reduced Search Costs and the Distribution of Bidder Participation Affect Auction Prices (July 17, 2014). Eric Overby, Karthik Kannan (2015) How Reduced Search Costs and the Distribution of Bidder Participation Affect Auction Prices. Management Science 61(6):1398-1420. Available at SSRN: https://ssrn.com/abstract=1977050 or http://dx.doi.org/10.2139/ssrn.1977050

Eric M. Overby (Contact Author)

Georgia Institute of Technology ( email )

800 West Peachtree St., NW
Atlanta, GA 30308-1149
United States

Karthik Natarajan Kannan

Purdue University ( email )

Krannert School of Management
West Lafayette, IN 47907
United States

Paper statistics

Downloads
85
Rank
249,484
Abstract Views
480