Working Paper: NBER ID: w25002
Authors: Kenneth Hendricks; Alan Sorensen
Abstract: Economic theory suggests that decentralized markets can achieve efficient outcomes if buyers and sellers have many opportunities to trade. We examine this idea empirically by developing a tractable dynamic model of bidding in an overlapping, sequential auction environment and estimating the model with detailed data from eBay. Bidders in the model discount their bids to reflect the option value of losing – if they lose, they can come back to try again – and the structure of the model makes it so they effectively bid against a stationary distribution of rivals. We find that dynamic participation makes the market meaningfully more efficient than a benchmark in which buyers have only one opportunity to bid, but the observed outcomes still fall well short of the fully efficient competitive equilibrium.
Keywords: auction markets; dynamic competition; market efficiency
JEL Codes: D10; D4; D44; D47; L0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| dynamic participation in the auction market (D44) | increased market efficiency (G14) |
| dynamic participation effect (C69) | enhanced competition among bidders (D44) |
| enhanced competition among bidders (D44) | more efficient outcomes (D61) |
| dynamic bidding behavior of buyers (D44) | efficiency of market outcomes (D61) |
| bidding patterns and structure of eBay auctions (D44) | increase in efficiency relative to static auction benchmarks (D44) |
| auction selection rules (D44) | effect on prices and efficiency (D61) |