Online Auction Markets with Increasingly More 'Practical' Items: The Effect of More Bidders on Sellers' Revenue

Abstract

Recently "practicals" such as computers and clothes account for a substantial amount of the total volume in online auction marketplaces. However, as bidders for practicals may easily find the same goods elsewhere, it is likely that they bid less aggressively than bidders of rare items such as collectibles. We present a model that incorporates the probability that a bidder will find goods identical to an auctioned item elsewhere. Based on the model and relevant actual auction data, it is argued that when the probability is close either to zero or to one, an increasing number of bidders do not improve revenue as much as when the probability is in a middle range. This paper is concluded with the implications for the viability of small auction-based online marketplaces as well as for a caveat to sellers in using promotional options.

Keywords: online auctions, auction and posted-price selling, online auction marketplaces, number of bidders, auction revenue

JEL Classification: D44