The Role of Risk Preferences in Pay-to-Bid Auctions

Abstract

We analyze a new auction format in which bidders pay a fee each time they increase the auction price. Bidding fees are the primary source of revenue for the seller, but produce the same expected revenue as standard auctions (assuming risk-neutral bidders). If risk-loving preferences are incorporated in the model, expected revenue increases. Our model predicts a particular distribution of ending prices, which we test against observed auction data. The degree of fit depends on how unobserved parameters are chosen; in particular, a slight preference for risk has the biggest impact in explaining auction behavior, suggesting that pay-to-bid auctions are a mild form of gambling.

The Impact of Buy-Now Features in Pay-per-Bid Auctions

“…Platt et al [19] develop a parsimonious model of rational bidders to predict particular distributions of ending prices in pay-per-bid auctions. the authors show that, with risk-neutral bidders, expected auction revenues are near the bidders' valuation of the auction item but that some categories (namely, video game paraphernalia) show significantly higher revenues.…”

“…the authors show that, with risk-neutral bidders, expected auction revenues are near the bidders' valuation of the auction item but that some categories (namely, video game paraphernalia) show significantly higher revenues. Platt et al [19] show that the incorporation of mild risk-loving preferences of bidders helps to explain the higher revenues in these categories.…”

“…pay-peR-Bid auctionS (e.g., [1,12,13,19,21,28]) are a fast-paced type of online auction that represent a new online trend [22]. Pay-per-bid auctions (also known as "penny auctions") differ from well-known auctions such as eBay (e.g., [3,10]) in several ways: Bidders pay a fee for every bid that they place, a bid can only change the price by a constant amount (i.e., a fixed increment), auctions have soft-close endings (i.e., every bid delays the end of the auction), and the auctioneer is usually also the seller of the product.…”

Beating Irrationality: Does Delegating to IT Alleviate the Sunk Cost Effect?

“…Further research is needed, however, to present additional evidence of this effect on other markets, in particular experimental studies that randomly manipulate participants' behavioral investments. In this respect, and in light of the argument that participants on pay-per-bid auction websites are generally inclined to be risk-seeking (Platt et al 2013), our results can be seen as providing a lower bound for the effects discussed in this paper.…”

Risk lovers and the rent over-investment puzzle

“…Using simple numerical analysis,Tullock (1980) shows the conditions under which rents are over-dissipated, namely non-linear rent-seeking production functions and the number of risk-neutral players. 5 Recent experimental studies suggest that risk-lovingness may help explain over-bidding in auctions; seeGneezy and Smorodinsky (2006) andPlatt et al (2013).6 Also known as the self-protection problem, first studied byEhrlich and Becker (1972).…”