When is Auctioning Preferred to Posting a Fixed Selling Price? http://www.anderson.ucla.edu/faculty/robert. zeithammer

Abstract: On eBay, identical goods are often sold simultaneously by two different mechanisms – auctions and posted prices. This coexistence of two mechanisms is a puzzle because other consumer markets tend to specialize in just one trading mechanism. We propose and empirically test several possible explanations of this puzzle: 1) randomization arising from seller indifference 2) second-degree price-discrimination 3) sorting of both buyers and sellers into two separate sub-markets, and 4) seller heterogeneity. In the explanation based on seller heterogeneity, we develop a new theory of mechanism-choice based on differences between the structure of mechanism-specific costs: auctioning several identical units of a good separately involves a variable per-unit cost due to risk, waiting and monitoring. In contrast, the demand-research necessary for posted-pricing involves a cost which is fixed across multiple units. Therefore, we predict that usage of posted prices in a given category should be positively correlated with seller scale and specialization in that category. The empirical test is conducted on a unique dataset that captures individual seller behavior across categories, allowing inference about sources of seller heterogeneity. The data does not offer strong support for the first three potential explanations because 1) choice of selling mechanism is not random either across or within seller 2) posted-price sales do not involve a consistent premium over auction sales, and 3) frequent eBay buyers use both mechanisms. On the other hand, we do find that both observed and unobserved seller heterogeneity are important correlates of mechanism-choice. The findings have implications on the age-old marketing question of how to sell consumer goods. In particular, we confirm the intuition that auction are used when the seller needs to establish a separate price for every item sold