Auction Sites

Economics, Psychology, and Social Dynamics of Consumer Bidding in Auctions

Amar Cheema, Washington University in Saint Louis *

Peter T. L. Popkowski Leszczyc, University of Alberta

Rajesh Bagchi, University of Colorado at Boulder

Richard P. Bagozzi, University of Michigan

James C. Cox, University of Arizona

Utpal M. Dholakia, Rice University

Eric A. Greenleaf, New York University

Amit Pazgal, Washington University in Saint Louis

Michael H. Rothkopf, Rutgers University

Michael Shen, University of Alberta

Shyam Sunder, Yale University

Robert Zeithammer, University of Chicago

* Correspondence should be addressed to Amar Cheema, Assistant Professor of Marketing, Olin School of Business, CB 1133, Washington University in St. Louis, St. Louis, MO 63130, Email: cheema@wustl.edu , Phone: (314) 925-6090. This paper is based on the special session at the 6th Triennial Invitational Choice Symposium, University of Colorado Boulder, June 2004 (co-chaired by the first two authors). The authors thank the editor and anonymous reviewers for insightful suggestions and comments.

Abstract

With increasing numbers of consumers in auction marketplaces, we highlight some recent approaches that bring additional economic, social, and psychological factors to bear on existing economic theory to better understand and explain consumers’ behavior in auctions. We also highlight specific research streams that could contribute towards enriching existing economic models of bidding behavior in emerging market mechanisms.

Key words: auctions, bidding, economic psychology, social dynamics, experimental economics

Scarce

The past decade has seen the advent and growth of online auction marketplaces, with online auction revenues expected to reach $36 billion by the year 2007 (C2C and B2C, Laudon and Traver 2004, p. 784). Study of specific auction formats for the past several decades has produced rich normative economic theories of rational buyers’ and sellers’ behavior (see Klemperer 1999 for a review). A majority of these theories are developed for rational individuals who bid on behalf of firms for resources such as offshore oil leases, or on behalf of wealthy bidders for expensive pieces of art, in auctions with a specific set of rules.

However, tests of normative theories have found that bidders depart from these predictions (see Chakravarti et al. 2002 for a review), highlighting the necessity of studies analyzing the gaps between the behavioral reality and “the well informed, rational, utility maximizing homo economicus of theoretical economics and game theory,” (Rothkopf 1991, p. 40), prompting calls for theoretical and empirical research from an economic as well as a behavioral perspective (Rothkopf and Harstad 1994).

In addition, most items now being sold in auctions are mass-produced and/or relatively inexpensive, and participants who bid on these products in auctions may receive utility from factors other than the price. Biases arising in these contexts are liable to be less costly than when bidding on one-of-a-kind, big-ticket items such as oil leases or Impressionist paintings. Thus, few of the assumptions required for the theory to be applicable exist in these auction marketplaces. Consequently, researchers need to focus on consumer characteristics and auction mechanisms that affect behavior in these choice contexts.

We focus on a set of economic, psychological, and social factors that are typically not considered in the context of auction behavior, but that improve our understanding of bidders’ behavior. We present ongoing research on these factors, and suggest topics for future research.

1. Auction Marketplaces

Auction marketplaces with a large number of buyers and sellers of substitutable products bring new challenges for both buyers and sellers. Sellers must determine better ways to auction multiple products over time. Buyers must also decide on a good bidding strategy when faced with a large number of nearly identical items (or close substitutes) in auctions that may end simultaneously, sequentially (one ends and the next starts), or overlap (some end before others).

For consumers who need one unit of a product, facing multiple auctions raises the issue of a budget constraint that may prevent them from bidding in multiple auctions, and/or the possibility of winning multiple auctions if they do bid in more than one auction simultaneously. Suppliers who bid on contracts in overlapping auctions face a similar problem, being limited by their capacity to fulfill multiple orders if several bids are accepted. Sellers of multiple products face a different problem when selling products with varying levels of substitutability вЂ" should they combine these products and auction the bundle, or should they auction them separately?

1.1. Overlapping Auctions

Buyers. In September 2004, eBay listed 10,599 auctions for digital cameras lasting up to 10 days (2,572 ending within 24 hours) - a staggering, albeit typical, number of options. Bidders considering hundreds of overlapping auctions may cope by considering only a subset of the available auctions as well as expected future auctions, and satisfice (Simon 1955). Contextual factors affecting the composition of such a subset are also of theoretical interest.

Zeithammer (2005a) models certain eBay product categories (MP3 players and DVDs) as a set of sequential auctions for identical units (ordered by the ending time), where buyers are informed about specific units coming up for sale in the near future and are assumed to have single-unit demand, and independent private values (IPV). He argues that optimal bidding reduces to solving the tradeoff between winning the auction ending first and the option value of participating in the future auctions, the latter depending on the information about future items. Bidders take detailed information about multiple auctions into account when constructing bids, and bid lower in the current auction when they know about future item availability. Zeithammer (2005b) finds analytically that the sellers are able to regulate buyer bid-shading whenever