Ravi Bapna’s online auction paper garners national media attention
A paper written by Associate Professor Ravi Bapna, Information and Decision Sciences, “Consumer Surplus in Online Auctions,” has been garnering a lot of national media attention, including being picked up by the New York Times and Reuters News Service. The paper is to appear in the December issue of the Information Systems Research journal.
The paper was designed to measure how much consumers benefit in Internet auctions. Online auctions facilitate billions of dollars of economic exchange in today’s economy. While the benefits of online auction sites to sellers are well documented, the benefits to consumers are harder to measure. Under normal conditions, consumers do not necessarily reveal how much they are willing to pay for certain items. The difference between what consumers are willing to pay and what they actually pay is called, “consumer surplus,” and it reflects how much utility a buyer derives from a transaction..
Bapna and his co-authors designed an ongoing, novel field experiment involving real bidders participating in real auctions, and voting with real dollars, to estimate consumer surplus in auctions on eBay, one of the most popular Internet auction sites. The estimation procedure relied mainly on knowing the highest bid, which is not disclosed by eBay, but was available to the authors from their experiment. Their analysis indicated that consumers extract a median surplus of at least $4 per eBay auction, which amounted to roughly $7.05 billion in total consumer surplus in the year 2003.
The implications of this study are multi-fold. First, it provides designers of electronic markets with specific, promotable information about the economic benefits for buyers that can help boost participation, liquidity, and market efficiency.
Second, the study raises questions about eBay’s current strategic decision to diversify its business focus away from online auctions. “Our analysis suggests that these mechanisms have always created economic welfare for consumers, and should be more attractive in down economic cycles,” Bapna said. “We believe that eBay has an opportunity to make its auctions more attractive and exciting, which in turn should yield opportunities to appropriate some of this surplus and improve its top-line results.”
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