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Posted By: mcavoy

In one of my advanced undergrad econ courses, the professor had a section on auction theory. From the seller's view, what is the best auction design to obtain the highest price? Auction design kind of has a time / information content element, as I recall. For instance, a large lot of a perishable, standardized product might be quickly sold to the highest bidder via a "Dutch Auction." A single item, more unique, might best be sold live with increasing incremental bids.

From the buyer's view, all "efficient" strategies, as I recall, were to either bid the buyer's second highest price (the buyer's true value was the best price, while the 2nd best price was the reservation price), or to remain in the bidding until the price reached the buyer's 2nd best price. Buyers do not want to pay their highest offer - what's the fun in that? (There is no consumer surplus if the buyer pays the true value).

With this policy, if a potential buyer wants the item at a lower price, economic theory states the buyers more readily reveals his (or her) 2nd best offer to the seller.

I think eBay must be employing economists to design new features. What I wonder is what does eBay get out of this new procedure? What does the seller get? I think most buyers would think twice before revealing their second best offer. The collecting universe in many items is small, so collectors would reveal lots of pricing information to sellers. I think sellers get alot of information they wouldn't have otherwise, and they may be willing to pay ebay alot for the chance to get it.

Maybe, the policy is intended for higher priced, rarely sold items, by persons who are just testing the market? ebay gets fees from item listings that would never have appeared otherwise?

Mike