Expectation, Disappointment, and Exit: Evidence on Reference Point Formation from an Online Marketplace

Matthew Backus, Thomas Blake, Dimitriy Masterov and Steven Tadelis

Journal of the European Economic Association, 2022, vol. 20, issue 1, 116-149

Abstract: We study disappointment and platform exit among new bidders in an online auction marketplace. In particular, we study a hybrid auction format with a “Buy-It-Now” option, which, when executed, will abruptly end the auction and cancel any standing bids. When this happens, if the formerly leading bidder is new to the platform, then they are 6 percentage points more likely to exit the marketplace for every additional day they spent in the lead. This is rationalized by disappointment-averse bidders with outside options and rational expectations about the likelihood of winning. Our explanation is validated by three ancillary predictions: when expectations are lowered by higher competing bids, there is no effect; sensitivity of exit is declining in prior experience; and, for bidders who do not exit, time in the lead during the first experience predicts a subsequent preference for fixed-price, rather than auction, listings.

Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:oup:jeurec:v:20:y:2022:i:1:p:116-149.

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