Explaining Price Dispersion in Online Auctions with Simple Frictions

Joseph Podwol, Cornell University
Henry S. Schneider, Cornell University

Abstract

Price dispersion in fixed-price markets is typically attributed to frictions that inhibit buyers from knowing all available prices. We extend this notion to markets with competing auctions. We start by incorporating the presence of some unaware bidders, as would arise from search and monitoring frictions, into the frictionless model of simultaneous ascending second-price auctions in Peters and Severinov (2006). This modification gives rise to price dispersion in competing auction markets and offers comparative static predictions, some of which are distinct from fixed-price markets. First, price dispersion is strictly increasing in the fraction of bidders who are aware (in contrast, in fixed-price markets, price dispersion has an inverse-U relationship with the fraction of buyers who are aware). Second, auctions won by aware buyers sell at lower prices. Third, the presence of frictions contributes significantly to price dispersion.

We test these predictions using observational auction data from eBay. We use wording differences between auction listing titles, which generate disparate search results across bidders, as a measure of search frictions; and cross-bidding across multiple competing auctions to identify aware bidders. We find results that are consistent with all of the theoretical predictions. Finally, we investigate the relationship between the number of competing auctions and price dispersion, and again find results that are distinct from fixed-price markets.