Economists may idolise auctions, but most people do not
THE first item sold on eBay, an online marketplace, was a broken laser pointer, which was snapped up for $14.83 in September 1995. By 2002 eBay had hosted nearly $15 billion of transactions and had more registered users than Britain had people. Yet the fad for online auctions faded almost as quickly as it appeared. Only 20% of sales on eBay, which turns 20 on September 3rd, now involve auctions.
At eBay’s inception, users could sell things only by auction. This was tremendously exciting for economists, who love the things for their ability to magic prices out of thin air and to allocate goods efficiently by determining who values them most highly. The main obstacle to holding auctions is the cost of bringing together enough interested buyers and sellers. But eBay made connecting buyers and sellers cheap. Without it, that broken laser pointer may well have languished unsold.
EBay also benefited from a first-mover advantage. Buyers want to go where there are lots of competing sellers, and sellers will flock to wherever they can find the most eager customers. The size of eBay’s network was its own, self-perpetuating engine of growth. But not all the millions of users piling in, it turned out, were economists, and thus devoted to auctions on principle.
In 2000, in response to demand from users, eBay allowed sellers to list items in hybrid auctions. The bidding process would proceed as usual, but buyers could circumvent the auction by agreeing to pay a fixed “Buy it Now” price. Recent research* suggests that this was quite useful for auctioneers. Anthony Ding of Stanford University finds evidence that setting a high “Buy it Now” value boosts the final price at auction, by encouraging bidders to think that the object is valuable.
Yet even hybrid auctions did not suit all sellers. Auctions are particularly useful for establishing the price of one-off or second-hand items, whose value might be unclear. But that is not necessary when it comes to mass-produced items like new CDs or electronic gadgets. Many professional retailers using eBay knew exactly what their inventory was worth, and saw no need for an auction. They often set a minimum bid equal to the “Buy it Now” price, making the auction redundant.
So in 2002 eBay started allowing its sellers to post objects for sale at fixed prices, without any form of auction. And in 2005 it allowed sellers to post objects at a precise price, but give buyers the chance to haggle (“best offer” transactions, in eBay’s patois). With all of these options available, the share of sales involving auctions has fallen steadily (see chart).
An NBER working paper from 2013 by Liran Einav, Chiara Farronato and Jonathan Levin of Stanford University and Neel Sundaresan of eBay Research Labs tries to work out why auctions have fallen out of favour. Of the 33 percentage-point drop in the share of auction listings between 2005 and 2009, they calculate, 2.5 percentage points were attributable to the greater preponderance of mass-produced goods on the site, and 2.8 percentage points to the influx of professional sellers. But that leaves 27.7 percentage points unexplained.
Unbiddable
One explanation may be that many buyers found auctions a hassle. In theory, they should be quick and easy. Economists would have expected bidders to decide the maximum they were willing to pay for an object, and then leave it to eBay’s software to raise their bid as necessary up to the sum concerned. But many buyers do not take advantage of this feature, nudging up their offer manually from time to time. That, in turn, opens the way for a strategy known as “sniping”. If buyers think that their rivals are bidding too low, then it makes sense to swoop in at the last minute and submit a winning bid so close to the end of the auction that others have no chance to respond.
Another NBER working paper, published in February by Matthew Backus of Cornell University, Tom Blake and Dimitriy Masterov of eBay Research Labs and Steven Tadelis of the University of California, Berkeley, looks at sniping. It finds that around 30% of bidders submit more than one bid, and that a similar share of auctions involve bids in the last ten seconds. They also find that bidders really hate being sniped—so much so that it might hurt eBay’s business. New buyers who lose an auction after being outbid at the last minute are 4–18% more likely to leave the platform than those who are outbid earlier in the process.
Even for the snipers clever or lucky enough to make the winning bid, this process takes time and energy. Mr Einav and co-authors suggest that in a world where social media are competing for users’ attention and smartphones have shortened attention spans, people are less willing to pour their efforts into such a labour-intensive method of shopping. They compare how the sales method affects the prices of otherwise similar items from the same vendor. Things sold under auction tend to go at a discount, which the authors term a “hassle cost” of the auction. They find that this discount, which is now around 8% of the fixed price on average, doubled between 2003 and 2009. Buyers, in other words, have gradually demanded more compensation to put up with the rigmarole of an auction.
There is still a place for auctions on eBay. Even for mass-produced goods, hybrid auctions offer a way for sellers to discriminate between impatient buyers who are willing to pay a premium to conclude a sale right away, and astute shoppers hunting for the best bargain via auctions. Nonetheless, in the first quarter of this year roughly 80% of eBay’s listings involved no auction in any form. Though it will struggle to shake off the association, eBay is no longer really an auctions website. For all their efficiency and their powers of price discovery, they were simply not necessary in most situations. For economists in search of broken laser pointers, however, auctions still hit the spot.
