When Rational Sellers Face Non-Rational Buyers: Evidence from Herding on Ebay

Abstract

We document that eBay bidders exhibit a biased preference for auctions with more bids, even if these are non-diagnostic of quality, creating an incentive for sellers to lower starting prices to attract early bids. We find that lowering starting prices succeeds in increasing the likelihood that an auction will receive additional bids, conditioning on its current price. We also find that, conditioning on dollar amount bid by bidders, those who engage in non-rational herding are less likely to win, and when they do win they pay higher prices. Supporting the premise that this is a mistake, experience reduces dramatically the tendency to engage in non-rational herding. Remarkably, the seller side of the market is in equilibrium: a high enough share of sellers chooses low starting prices for expected revenues to be identical for high and low starting prices. In sum, market forces in eBay eliminate the rents associated with exploiting the behavioral bias we identify, but not the bias itself.

Keywords: Auctions, herding, behavioral economics, misattribution, biases

JEL Classification: D01, D12, D21, D80