Consumer Surplus in Online Auctions

Abstract

Despite the growing research interest in Internet auctions, particularly those on eBay, little is known about quantifiable consumer surplus levels in such mechanisms. Using an ongoing novel field experiment that involves real bidders participating in real auctions, and voting with real dollars, we collect and examine a unique dataset to empirically quantify and understand determinants of consumer surplus in eBay auctions. The estimation procedure for private value auctions relies mainly on knowing the highest bid, which is not disclosed by eBay, but is available to us from our experiment. For common value auctions, where bidders bid strategically to avoid winner's curse, we develop an estimation procedure that infers the bidders' signals from their bids, and subsequently infers the item's common value and resulting surplus, from the signals. Our analysis, based on a sample of 4514 eBay auctions, indicates that the average surplus level per eBay auction is $15.59, which roughly translates to $6.5 billion in accrued consumer surplus for the year 2003 alone. We find that consumer surplus is significantly different across currencies and item categories, negatively influenced by seller experience, auction duration and competition, and positively influenced by bidder experience, bidder aggressiveness and item price.

Keywords: eBay, sniping, highest bid, Weibull distribution