Expertise in Online Markets

Online second-price auctions with a hard stop such as those in eBay have raised interesting research questions on buyer and seller behavior. Using an analytical model incorporating buyers ’ information asymmetry regarding the common value of an item, we examine two main questions: first, we provide an explanation for the common phenomenon of “sniping ” (bidding in the last moments before auction close); second, we investigate signaling effects of sellers ’ choice among auctions and posted prices. We show that (i) sniping may increase sellers ’ revenue, (ii) contrary to the linkage principle, auction platforms may benefit from hiding information about the common value of the item, and (iii) there may be separating equilibria in which high-common-value items are sold in auctions and low-common-value items are sold using posted price. Our analytical models are the first to examine the effects of sniping on auction revenue and the signalling effects of the choice of the seller’s mechanism (auction or posted price) on buyers ’ beliefs.