A comparison of different pay-per-bid auction formats

Pay-per-bid auctions are a popular new type of Internet auction that is unique because a fee is charged for each bid that is placed. This paper uses a theoretical model and three large empirical data sets with 44,614 ascending and 1,460 descending pay-per-bid auctions to compare the economic effects of different pay-per-bid auction formats, such as different price increments and ascending versus descending auctions. The theoretical model suggests revenue equivalence between different price increments and descending and ascending auctions. The empirical results, however, refute the theoretical predictions: ascending auctions with smaller price increments yield, on average, higher revenues per auction than ascending auctions with higher price increments, but their revenues vary much more strongly. On average, ascending auctions yield higher revenues per auction than descending auctions, but results differ strongly across product categories. Additionally, revenues per ascending auction also vary much more strongly.</p

Prospect theory in a dynamic game: Theory and evidence from online pay-per-bid auctions

Abundant evidence exists that expected utility theory does not adequately describe decision making under risk. Although prospect theory is a popular alternative, it is rarely applied in strategic situations in which riskarises through individual interactions. This study fills this research gap by incorporating prospect theory preferences into a dynamic game theoretic model. Using a large field data set from multiple online pay-per-bid auctionsites, the authors empirically show that their proposed model with prospect theory preferences makes a better out-of-sample prediction than a corresponding expected utility model. Prospect theory also provides a unifiedexplanation for two behavioral anomalies: average auctioneer revenues above current retail prices and the sunk cost fallacy. The empirical results indicate that bidders are loss averse and overweight small probabilities, suchthat the expected revenue of the auction exceeds the current retail price by 25.46%. The authors illustrate and empirically confirm a managerial implication for how an auctioneer can increase revenue by changing the detailsof the auction design.</p

Prospect theory in a dynamic game: Theory and evidence from online pay-per-bid auctions

Abundant evidence exists that expected utility theory does not adequately describe decision making under risk. Although prospect theory is a popular alternative, it is rarely applied in strategic situations in which riskarises through individual interactions. This study fills this research gap by incorporating prospect theory preferences into a dynamic game theoretic model. Using a large field data set from multiple online pay-per-bid auctionsites, the authors empirically show that their proposed model with prospect theory preferences makes a better out-of-sample prediction than a corresponding expected utility model. Prospect theory also provides a unifiedexplanation for two behavioral anomalies: average auctioneer revenues above current retail prices and the sunk cost fallacy. The empirical results indicate that bidders are loss averse and overweight small probabilities, suchthat the expected revenue of the auction exceeds the current retail price by 25.46%. The authors illustrate and empirically confirm a managerial implication for how an auctioneer can increase revenue by changing the detailsof the auction design.</p

A comparison of different pay-per-bid auction formats

Pay-per-bid auctions are a popular new type of Internet auction that is unique because a fee is charged for each bid that is placed. This paper uses a theoretical model and three large empirical data sets with 44,614 ascending and 1,460 descending pay-per-bid auctions to compare the economic effects of different pay-per-bid auction formats, such as different price increments and ascending versus descending auctions. The theoretical model suggests revenue equivalence between different price increments and descending and ascending auctions. The empirical results, however, refute the theoretical predictions: ascending auctions with smaller price increments yield, on average, higher revenues per auction than ascending auctions with higher price increments, but their revenues vary much more strongly. On average, ascending auctions yield higher revenues per auction than descending auctions, but results differ strongly across product categories. Additionally, revenues per ascending auction also vary much more strongly.</p