How Efficient are Decentralized Auction Platforms?

55 Pages Posted: 20 Sep 2016 Last revised: 24 Sep 2016

See all articles by Aaron Bodoh-Creed

Aaron Bodoh-Creed

University of California, Berkeley - Haas School of Business

Jörn Boehnke

Harvard University

Brent Richard Hickman

University of Chicago

Date Written: August 1, 2016

Abstract

We provide a model of a decentralized, dynamic auction market platform (e.g., eBay) in which a large number of buyers and sellers participate in simultaneous, single-unit auctions each period. Our model accounts for the endogenous entry of agents and the impact of intertemporal optimization on bids. Solving our model with a finite number of bidders is computationally intractable due to the curse of dimensionality, so we prove that a continuum version of our model provides a good approximation of an equilibrium in the finite model. We use the approximation to estimate the structural primitives of our model using Kindle sales on eBay. We find that just over one third of Kindle auctions on eBay result in an inefficient allocation with deadweight loss amounting to 13.5% of total possible market surplus. We also find that partial centralization - for example, running half as many 2-unit, uniform price auctions each day - would eliminate a large fraction of the inefficiency, but yield lower seller revenues. Our results highlight the importance of understanding platform composition effects - selection of agents into the market - in assessing the implications of market design.

Keywords: Dynamic Auctions, Approximate Equilibrium, Internet Markets

JEL Classification: C73, D4, L1

Suggested Citation

Bodoh-Creed, Aaron and Boehnke, Jörn and Hickman, Brent Richard, How Efficient are Decentralized Auction Platforms? (August 1, 2016). Becker Friedman Institute for Research in Economics Working Paper No. 2016-22, Available at SSRN: https://ssrn.com/abstract=2839902 or http://dx.doi.org/10.2139/ssrn.2839902

Aaron Bodoh-Creed

University of California, Berkeley - Haas School of Business ( email )

Berkeley, CA 94720
United States

HOME PAGE: http://faculty.haas.berkeley.edu/acreed/

Jörn Boehnke

Harvard University ( email )

Cambridge, MA
United States

HOME PAGE: http://jboehnke.com

Brent Richard Hickman (Contact Author)

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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