eBay and Rationality

Tim Harford writes:

You might think that if there’s one thing an economist should be able to tell you how to do, it’s successfully list an item on the auction Web site eBay. Auction theorists are, after all, celebrated in the profession; one of them, Susan Athey, won the John Bates Clark medal in April. (Clark medalists, who include Paul Samuelson, Joe Stiglitz, and Steve Levitt, are scarcer than Nobel laureates.)

Yet, although the theory of auctions is well-developed, its predictions are sensitive to wrinkles in reality. For example, the standard economic assumption that people are rational is usually a good one: When the price of beer rises, most people drink less beer. But auctions require “if he thinks that she thinks that I think that he thinks” chains of reasoning that tend to have weak links. Those links can easily break if any bidder has any reason to suspect that any other bidder is irrational.

2 responses to “eBay and Rationality

  1. It goes to show that assumptions are just that, until proven in the field.

    I’ve bought and sold on ebay enough to know the basics… Reserve prices are almost always counter productive for the same reason that it’s better to start the bidding very low than to start it closer to what you’re expecting to sell at. My current theory (based on my own behavior) is that the mere potential to get an item at a lower price than average draws more bids. This tied to another observation of mine: That the more competition there is between bidders (measured in the number of bids), the more likely the final price will be above average. My hypothesis is that the competitive desire to “win” the auction has the tendency to override the bidder’s sensitivity to price. This happens despite the existence of other auctions for the same item at the same time with a lower current bid.

    I’ve not been paying too much attention to Econ liturature since graduating from college in ’96 but I would have thought ebay would be it’s own field of study by now. I assumed that this sort of study would be a standard project for undergrads.

  2. thanks for this post. It helped me a lot. Btw How you get ideas for such posts. sorry if it’s out of topic.

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