Faculty of Economics and Business Administration Publications Database

Vickrey vs. eBay: Why Second-price Sealed-bid Auctions Lead to More Realistic Price-Demand Functions

Barrot, Christian
Albers, Sönke
Schäfers, Björn
Volume: 14
Number: 4
Pages: 7 - 38
Month: Summer
ISSN-Print: 1086-4415
Link External Source: Online Version
Year: 2010
Keywords: Market research; On-line auctions; Pricing; Vickrey auctions; Willingness-to-pay

Knowledge of consumers'' willingness-to-pay (WTP) is critical for marketing managers when designing optimal pricing policies. The large-scale applicability, reliability, and validity of Vickrey auctions as an incentive-compatible method for eliciting WTP in a real-world setting were tested empirically. The results of 6,548 sealed bids in 28 auctions of costly durables on a popular auction Web site show that regular on-line shoppers have little problem understanding and applying the Vickrey auction bidding strategy. As a result, Vickrey auctions can easily produce a reliable and valid distribution of WTP based on several thousand consumers. A comparison of Vickrey auctions with the more commonly used English or eBay auctions shows, both conceptually and empirically, that the latter formats do not fully reflect the complete range of potential customers'' WTP and, therefore, lead to systematic overestimation of price-demand functions. In contrast, WTP information elicited through Vickrey auctions is undistorted by strategic behavior such as bid-sniping and incorporates the full range of WTP information, suggesting that it is better suited for estimating realistic price-demand functions for market research purposes.