Evaluating the impacts of auction bidding restrictions on consumer surplus and behaviors an empirical study of penny auctions

Penny auction is an innovative, popular online auction format in which bidders are charged a small fee for placing each bid. A penny auction typically ends up with an extremely low final auction price, such that only one winning bidder can derive positive consumer surplus whereas other bidders lose out from the bidding costs. This makes it challenging to retain bidders who rarely win. Using a field experiment, we empirically evaluate how novel auction rules can improve overall consumer retention and long-term bidding participations. Specifically, we implemented three restrictions on bidding activities of customers. Our results show these restrictions enhance the overall number of bids by 50%. The intuition is to restrict the winning probability of a small group of bidders who won most of the auctions so that more bidders can enjoy the thrill and fun of winning an auction, inducing them to bid more in the long run