Estimating Inefficiency in Online Auctions

Abstract

In this paper, we estimate the inefficiency in online auctions. Online auctions can be inefficient due to the Internet fraud. A typical example of Internet fraud is when sellers do not send goods to winning bidders even though they have received payment. Therefore, bidders always bear a risk of fraud, and this risk may lead to transaction failure. In our empirical example, we use eBay PlayStation 3 auctions held in 2009. We find that the efficiency loss is over $30 for more than 5% of online auctions. Furthermore, we also find the probability of the inefficient online auction is more than 0.25.