In the early days of the internet, many observers speculated that technology would shift retail markets towards more dynamic and flexible pricing mechanisms. In 2000, The Economist wrote that the internet had introduced ‘the possibility of a permanent worldwide bazaar in which no prices are ever fixed for long, all information is instantly available, and buyers and sellers spend their lives haggling to try to get the best deals’.
The best example is eBay, which became the dominant platform for consumer auctions. eBay made it easy for sellers to run auctions, and made bidding fun and relatively convenient for buyers, who didn’t need to pay attention every minute because they could submit proxy bids that authorized eBay to respond to rival bids. By 2001, eBay was the third-ranked website in terms of time spent by consumers.
Since then, online commerce has grown enormously. But internet auctions have not. Instead, most online commerce nowadays takes place at posted retail prices. Our study explores why, using detailed data from eBay to distinguish between competing explanations.
One hypothesis is that the composition of internet sellers or of items being sold online has changed. But at least on eBay, this does not appear to explain the move to posted prices. Instead, the shift has occurred within natural groupings of sellers and products.
Another possibility is a change in consumer tastes. Ten years ago, internet auctions were a form of entertainment. Today, YouTube, Facebook and other media compete for our online attention. Finally, the ‘price discovery’ benefits of auctions may have declined. Online search has made it easier to find comparable prices and increased competition may have narrowed sellers’ margins.
Economic theory suggests that auctions have the greatest benefits when sellers don’t know the appropriate price and can benefit from competition between buyers. We develop a simple model in which sellers compare this price discovery benefit of running an auction with the convenience of using a posted price.
Modeling the trade-off allows us to match the basic patterns in the data, including robust evidence that auctions listings tend to have higher probabilities of being sold but lower prices. The model captures how reduced uncertainty about an item’s value, greater retail competition and greater demand for convenience all favor posted prices.
To evaluate sellers’ incentives to use auctions, we take advantage of the prevalence of ‘seller experimentation’ on eBay - the very high frequency with which sellers post identical listings either simultaneously or over time while varying their sale format or other pricing parameters. We look for sellers who have experimented by both running auctions and setting posted prices in 2003 (when auctions were dominant) and then in 2009 (when posted prices had overtaken auctions).
An immediate finding from these data is the gradual growth of an ‘auction discount’ - the difference between what a seller receives if she offers an item by auction and the posted price at which she is selling the (same) item. The auction discount rose from less than 5% in 2003 to 16% by 2009.
The data also reveal how the demand for auction listings relative to posted price listings has fallen considerably, shifting sellers’ incentives towards using posted prices. The change in sellers’ incentives is driven in part by a reduction in residual demand (for example, due to increased competition) and in part by a reduction in the relative demand for auctions (for example, due to a greater preference for convenience, perhaps due to competition from other online diversions). The latter could explain 40% or more of the shift in sellers’ incentives.
The decline of internet auctions may also be exacerbated by the increased use of smart phones by eBay users. On smart phones, eBay browsing sessions are 25% shorter and cover 50% fewer page views, so we might expect smart phone users to favor convenience even more.
Our study also considers why the two sales mechanisms might continue to co-exist. One obvious reason is the heterogeneity of goods traded online and the diversity of sellers. It is natural that idiosyncratic and hard-to-price items, particularly valuable ones, should be offered by auction or that inexperienced sellers might enjoy some benefit from letting the market determine the appropriate price for their product.
More interesting is the possibility that experienced sellers of retail items would use auctions in combination with posted prices, a typical pattern. We show that such a strategy can be a desirable form of price discrimination. From this perspective, some of the current use of online auctions, at least on eBay, may simply be analogous to the types of mixed marketing strategies commonly seen in retail.
Finally, while studying eBay - which in 2009 had 90 million active users and $57 billion in gross merchandise volume – is of interest in its own right, a natural question concerns the extent to which our findings apply more generally. The 2010 decision of Prosper, one of the two leading social lending websites, to abandon its original auction model in favor of preset interest rates suggests that similar mechanisms may be at play elsewhere. Indeed, Prosper’s chief executive explained the decision by arguing that pre-set rates were more efficient and that auctions were ‘too complicated’.
A more careful answer to the question would require data we don’t currently have - for example, on users’ internet browsing and the extent to which other online entertainment options have crowded out the early excitement associated with bidding in online auctions. This is a promising avenue for future research.
This article summarizes ‘Sales Mechanisms in Online Markets: What Happened to Internet Auctions?’by Liran Eirav, Chiara Farronato, Jonathan Levin and Neel Sundaresan. Liran Eirav, Chiara Farronato, and TNIT member Jonathan Levin are at Stanford University. Neel Sundaresan is at eBay Research.
The preceding post, written by Romesh Vaitilingam, is re-published on TAP with permission by the Toulouse Network for Information Technology (TNIT). “Whatever Happened to Internet Auctions?” was originally published in TNIT’s January newsletter.