Of Pennies and Prospects: Understanding Behaviour in Penny Auctions

27 Pages Posted: 6 Sep 2014

See all articles by Hinnerk Gnutzmann

Hinnerk Gnutzmann

Leibniz Universit├Ąt Hannover - Faculty of Economics and Management

Date Written: August 1, 2014

Abstract

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

Gnutzmann, Hinnerk, Of Pennies and Prospects: Understanding Behaviour in Penny Auctions (August 1, 2014). Available at SSRN: https://ssrn.com/abstract=2492108 or http://dx.doi.org/10.2139/ssrn.2492108

Hinnerk Gnutzmann (Contact Author)

Leibniz Universit├Ąt Hannover - Faculty of Economics and Management ( email )

Koenigsworther Platz 1
Hannover, 30167
Germany

HOME PAGE: http://www.gnutzmann.info

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