Reserve prices in online auctions: Theory and evidence

Objectives:The paper has two objectives. The first is to propose a simple model of auction in which the sellers choose the reserve price and the buy-it-now (BIN) price to maximize revenue, and shows that the three main sales channels (auction formats) in the online auctions (the pure auction, the BIN auction, and the fixed-price sale) are each of a optimal listing for the sellers, depending on their degrees of time-preference. Moreover, the theory also predicts that the optimal posted price for the fixed-price listing is greater than the optimal reserve price for the BIN auction, which in turn is greater than that for the pure auction. The paper's second objective is to empirically test the prediction of the theoretical model.

Data: The eBay auctions of iPods. We collected 1,187 auctions of iPods which cover all three auction formats.

Methods: We first formally prove the theoretical results mentioned in the Obectives above. We then conduct the empirical investigation. Reserve price is taken as the dependent variable. After controlling for other factors that influence the seller's choice of the reserve price, we want to show that the posted price in the fixed-price format is greater than the reserve price for the buy-it-now auctions, which in turn is greater than the reserve price for the pure auctions. This is done by constructing two dummy variables, one for the buy-it-now format, and the other for the fixed-price format. If the theoretical prediction is correct, both dummies should have positive coefficients in the regression, wth that for the fixed-price dummy greater than that for the buy-it-now dummy. In order to account for the possibe endogenous format choice of the seller, we also find two instrument variables (IV) for the fixed-price and buy-it-now dummies.

Results: The theoretical prediction is confirmed by the regression results. Moreover, the two choices of IVs also pass the endogeneity test, implying there indeed is endogeneity in fomar selection, and that our selection of IVs is appropriate.