Bad mechanism design in auctions
Draft of 2006.09.10 ☛ 2015.04.07 ☛ 2017.07.17
Abstract: This paper analyzes a unique dataset of art auctions on eBay. We study the behavior of buyers and sellers, demand and supply, by means of a novel structural estimation approach. Our empirical framework considers the process of arrival of new bidders as well as the distribution of bidder valuations of artworks being auctioned. We use this empirical framework to quantify the effect of market congestion, and congestion pricing strategies implemented by the market intermediary. Because we explicitly model the process of arrival of new bidders, we can estimate the effect of congestion pricing on the number of bidders, the distribution of bidders’ valuations, and the final selling price. Using the structural model we can also measure the impact of congestion pricing on the revenues of the artists and the market intermediary, as well as its effect on consumer surplus. Our results indicate that the congestion pricing policy acts as a coordination mechanism that facilitates the match between buyers and sellers.