Public Versus Secret Reserve Prices in eBay Auctions:Results of a Pokémon Field Experiment

1. Public Versus Secret Reserve Prices in eBay Auctions:Results of a Pokémon Field Experiment Rama Katkar, General Atlantic Partners David Reiley, University of Arizona

2. Electronic commerce increases the feasibility of field experiments. • New types of commerce, such as automated online auctions, make it easier to conduct economic experiments outside of the laboratory. • Subjects can be recruited in online markets. • The subjects have experience with the types of economic institutions being tested. • Lucking-Reiley (AER, 1999) gives one example: conducting tests of revenue equivalence between auction formats in a marketplace based in an online discussion group. • Since that early experiment (1994-5), Web-based online auctions have taken off. • Lucking-Reiley (2000) surveys 142 different online-auction sites. • eBay transactions were over $3 billion in 1999.

3. There have been an increasing number of studies of field data from online auctions... • Lucking-Reiley et al. (2000) - reputation, auction length • Hauser and Wooders (2000) - reputation • Wilcox (1999) - bid timing (experience, good type) • Roth and Ockenfels (2000) - bid timing (experience, auction format) • Bajari and Hortaçsu (2000) - structural econometrics (winner’s curse, entry, secret reserve prices) … but some questions can be answered more clearly with an active experiment than with passively gathered field data.

4. eBay auctions feature both public minimum bids and secret reserve prices. • The seller sets the opening bid amount, which can be thought of as a public reserve price. • The seller may also optionally specify a secret reserve price. If the auction ends at a price below the reserve, the good will be declared unsold. • The automated auctioneer will accept any bids that beat the current high bid, even if they are below the secret reserve price. If the high bid is below the reserve, bidders can see a message that “the reserve has not been met.”

5. Why might sellers want a secret (instead of public) reserve price? • Some sellers fear that high public minimum bids tend to scare away buyers. • A low opening bid may grease the wheels of commerce and get “bidding momentum” started… perhaps shooting up past the amount of a high secret reserve. • Vincent (1994) uses a common-value bidding model to provide a more formal explanation for secret reserves.

6. Do secret reserve prices really help the seller? If so, how much? • We’re skeptical of the assertion that “if secret reserves are used in practice, they must increase revenues.” We want to measure the effect directly. • Note that there is heterogeneity on eBay: some sellers use secret reserves, others don’t. • We designed a field experiment to answer this question in one particular market: Pokémon cards.

7. Our experiment controls for the good and for auction timing. • 50 matched pairs of Pokemon cards, each card in a separate 7-day auction. • Within each pair, two treatments: • 1. Minimum bid $X, no secret reserve. • 2. Minimum bid $0.05, secret reserve $X. • We wanted to choose X so that the reserve was likely to be binding. (We chose 30% of “book value.”) • 25 pairs had treatment 1 first, while the other 25 pairs had treatment 2 first.

8. Overview of the experiment:

9. Result 1. Secret reserve prices reduce the probability of selling the good. • 72% of public-reserve auctions resulted in a sale. • 46% of secret-reserve auctions resulted in a sale. • Card group 1: 56% versus 48% • Card group 2: 88% versus 40% • Card-by-card results:

10. Result 2. Secret reserve prices reduce the number of serious bidders. • 186 total bids in secret-reserve auctions, vs. 79 total bids in public-reserve auctions. • But this misleading in a sense, because the public minimum bids censor low bids. • Restricting attention to “serious bids” (number of bids above our level X), we find 43 secret-reserve bids versus 79 public-reserve bids.

11. Is there data-censoring bias in our statistics on serious bidders? • Note that eBay will not register a bid amount lower than the current high bid in an auction. • Do secret-reserve auctions reach high prices faster than public-reserve auctions? • Data on late bids (last 90 minutes) have no obvious trend: • 43% of bids, 58% of winning bids in public-reserve auctions • 31% of bids, 65% of winning bids in secret-reserve auctions • Bias does not seem to be a serious problem.

12. Result 3. Secret reserve prices reduce the realized auction price. • Note censoring: the auction price cannot be observed to be less than the minimum bid. • We perform a censored-normal regression (similar to Tobit) of price on the treatment variables, with card fixed effects.

13. The card fixed-effects estimates:

14. Why would secret reserve prices hurt the seller? • Note that on eBay, the presence of a secret reserve price is advertised, unlike at live auction houses. • Apparently secret reserves scare some bidders away. • From an eBay discussion board: • “using a reserve price and a separate beginning bid is pretty damn STUPID. It not only wastes bidders time, but is also an insult.” • “I usually hit the back button when I see a reserve auction… can’t be bothered wasting my time.”

15. Why do sellers really use secret reserve prices? • In this market, secret reserve prices appear to damage the seller’s realized auction price. • In addition, eBay now (as of Sept 1999) charges additional fees ($1) to sellers using secret reserve prices. • Some sellers have been known to contact the high bidder even when “the reserve has not been met,” and offer to sell the item to that bidder anyway. This is in violation of eBay’s rules, as it results in sellers being able to avoid paying eBay’s commission.

16. Result 4. A number of eBay bidders report being contacted by the seller after the auction. • Random sample of auctions completed across categories on eBay, Sept-Oct, 2000. • 171 bidders surveyed, 48 responded. • Each was the high bidder in an auction with an unmet secret reserve. • 27% were contacted by the seller after that auction, with an offer to sell the good even though the auction did not result in a transaction. • 52% had been contacted in this way at least once. • 31% had completed such a transaction at least once.

17. So how important are secret reserves, really, in practice? • eBay sellers do not secret reserve prices all that frequently. • August 1999 sample of 2800 Indian-cent auctions: 19% feature a secret reserve price, and 9% end with “reserve price not met.” • Sept-Oct 2000 sample of 6927 auctions across all categories: 4.1% with secret reserve, and 2.4% with secret reserve unmet. • Bajari and Hortacsu (2000) find that secret reserve prices are used more often for higher-value items (within coin proof sets). • Open question: can we find some type of good where reserve prices do not hurt the seller?

18. Conclusion: Secret reserve prices may produce worse auction outcomes. • We compared public versus secret reserve prices, controlling for the level of the reserve and the good being sold. This direct comparison would have been impossible to achieve with field data, because secret reserve amounts are unobservable. • Secret reservesappear to reduce the probability of sale, the auction price, and the number of serious bidders. • How robust are these results? • Different types of goods • Higher-valued items • Different reserve-price magnitudes