The Winner's Curse: Non-standard Behavior in Online Auctions

Overbidding has been a concern among auction participants since the advent of auctions, but this phenomenon has been difficult to quantify since overbidding is defined relative to each participant’s subjective valuation. However, using a framework with a continuous fixed price available where the bidder may “buy it now (BIN)” as found on eBay, it is possible to detect the presence of overbidding relative to a value independent of consumer subjectivity. The purpose of this project is to explain overbidding via standard auction features and behavioral factors. It is hypothesized that limited attention by the bidder would have the greatest explanatory power in overbidding, due to the effect of biases and non-standard preferences in raising auction prices. 5000 auctions for a core item and a cross-sectional dataset for a broader spectrum of items from eBay were examined for the prevalence of overbidding and correlations with differences in shipping costs, sales tax, seller reputation, quality, buyer experience, and availability of fixed price. 34% of auctions (47% with shipping costs) had a final price exceeding the fixed price. The behavioral factor of gaining utility through winning is examined via correlations between whether the winner overbid and time spent as lead bidder. Limited attention also plays a part; items are 1.17 times more likely to be bid on per row away from a fixed price auction in the listings. These results indicate buyers do not always purchase the lowest price goods available and have broader implications regarding non-standard behavior in competition in different markets.