Of Pennies and Prospects: Understanding Behaviour in Penny Auctions
27 Pages Posted: 6 Sep 2014
Date Written: August 1, 2014
Penny auctions are a novel selling mechanism, which combines an auction with elements of a lottery. Using a large dataset gathered online, I show that penny auction profitability - while high on average - is negative for low-value goods. Early bids have lower expected return and low bid increments are associated with greater profits. I develop a prospect theory model of penny auction bidding and show that it replicates all these stylised facts; parameter estimates are in line with the literature. This adds further evidence on the usefulness of prospect theory in providing a descriptive theory of behaviour under risk. Moreover, I show that prospect theory outperforms the rationalistic alternative hypothesis of risk-loving bidders.
Keywords: penny auctions, prospect theory, bid fee, online auction
JEL Classification: D12, D03
Suggested Citation: Suggested Citation