Penny Auctions are Unpredictable

Toomas Hinnosaar

No 305, Carlo Alberto Notebooks from Collegio Carlo Alberto

Abstract: I study an auction format called penny auctions. In these auctions, every bid increases the price by a small amount, but it is costly to place a bid. The auction ends if more than some predetermined amount of time has passed since the last bid. Outcomes of real penny auctions are surprising: even selling cash can give the seller an order of magnitude higher or lower revenue than the nominal value. Sometimes the winner of the auction pays very little compared to many of the losers at the same auction. The unexpected outcomes have led to the accusations that the penny auction sites are either scams or gambling or both. I propose a tractable model of penny auctions and show that the high variance of outcomes is a property of the auction format. Even absent of any randomization, the equilibria in penny auctions are close to lotteries from the buyers’ perspective.

Keywords: penny auction; Internet auctions; bid fees; gambling (search for similar items in EconPapers)
JEL-codes: C73 D11 D44 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2013
New Economics Papers: this item is included in nep-gth
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:cca:wpaper:305

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