Working Papers
Default in Online Auctions – An Empirical Approach
I analyze the use of default penalties and their impact on bidding functions and seller revenue in online coin auctions. In common-value settings, when bidders can observe all the bids that have been submitted by competitors, they may prefer to default on their purchase and forego a deposit than consummate the transaction when they face a sufficiently large ex post winner’s curse. Sellers should correspondingly trade off surplus extraction via a low deposit and bidder participation via a high deposit to maximize revenue. Using a stylized model that incorporates endogeneous entry by bidders, I find that this mechanism has a large impact on seller revenue, suggesting an almost 30% increase in revenue in the counterfactual where the seller requires bidders to post the optimal level of deposit when submitting a bid.