Consumers actually don’t like online auctions
The recent lecture on auctions discussed many examples of auctions and why they work well. If auctions are so great, then why are offerings on online marketplaces increasingly dominated by fixed prices (Einav et all, 2015)? Take a look at the distribution of price formations at eBay in figure 1.
Theoretically, auctions should be better for both buyers and sellers due to the efficient allocation of goods to the person that values them most highly. Online platforms like eBay make connecting enough buyers and sellers together both cheap and convienent. Due to eBay’s first mover advantage, the theoretical desireability of auctions, and network effects we should see an ever increasing amount of online auctions. Why then, is the exact opposite happening?
It turns out that the theoretical desireability of auctions doesn’t transfer well to the real world at eBay. Most new users use an incremental bidding technique -they manually place a higher bid when they are outbid- and don’t use an automatic reserve based system. This opens them up to auction sniping, and apperently people really don’t like getting ‘sniped’.
So what is sniping? Snipers place bids in the final seconds of auctions with predetermined ending times (like those at eBay), with the aim of getting the deal. In this way, incremental bidders can lose an auction at a price that is still under their reserve. Bidders respond strongly to sniping, when someone gets sniped they are between 4 and 18 percent less likely to return to the platform (Backus et al, 2015).
Other than sniping, there is the required investment of time and energy associated with auctions. Einav et al suggest that users don’t want to spend that time and energy when shopping, they want to spend it on social media instead.
So as it turns out, consumers don’t like online auctions that much. They think they are too labor-intensive and care a great deal about the sniping problem.
SALES MECHANISMS IN ONLINE MARKETS: WHAT HAPPENED TO INTERNET AUCTIONS? Liran Einav Chiara Farronato Jonathan D. Levin Neel Sundaresan
IS SNIPING A PROBLEM FOR ONLINE AUCTION MARKETS? Matthew Backus Tom Blake Dimitriy V. Masterov Steven Tadelis