MARKETING SCIENCE The Sealed-Bid Abstraction in Online Auctions 2010

This paper presents five empirical tests of the popular modeling abstraction that assumes bids from online auctions with proxy bidding can be analyzed 'as if' they were bids from a second-price sealed-bid auction.

The tests rely on observations of the magnitudes and timings of the top two proxy bids, with the different tests stemming from different regularity assumptions about the underlying distribution of valuation signals. The authors apply the tests to data from three eBay markets—MP3 players, DVDs, and used cars—and reject the sealed-bid abstraction in all three data sets. A closer examination of these rejections suggests that they are driven by less experienced bidders. This consistent rejection casts doubt on several existing theories of online auction behavior and suggests some demand estimates based on the abstraction can be biased. To assess the direction and magnitude of this bias, the authors propose and estimate a new model in which some bidders conform to the abstraction while other bidders bid in a reactive fashion. Because reactive bidding can be at least partially detected from the data, the authors are able to estimate the underlying distribution of demand and compare it to what the sealed-bid abstraction implies. The authors find that their proposed model fits the data better, and their demand estimates reveal a large potential downward bias were they to assume the second-price sealed-bid model instead.