Expertise in Online Markets

Stylianos Despotakis, Isa Hafalir, R Ravi and Amin Sayedi

No 2015-E8, GSIA Working Papers from Carnegie Mellon University, Tepper School of Business

Abstract: The phenomenon of sniping - submitting bids in the last minute - in online auctions has highlighted the existence of knowledgeable buyers or experts in such markets. In this paper, we consider online markets with auctions with hard or soft close and posted prices, and examine the effect of the presence of experts on other buyers, the platform and the sellers. We model buyer expertise as the ability to accurately predict the quality, or condition, of an item. In auctions with a hard close, while sniping emerges as an equilibrium strategy for experts, we show that non-experts bid more aggressively as the proportion of experts increases. As a consequence, we obtain the surprising implication that the auction platform may obtain a higher revenue by enforcing a hard close rather than a soft close in online auctions, thus providing a simple explanation for the prevalence of this format. In online markets where both auctions and posted prices are available, we show that the presence of experts allows the sellers of high quality items to signal their quality by choosing to sell via auctions.

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Journal Article: Expertise in Online Markets (2017)
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