A Theory of Bidding Dynamics and Deadlines in Online Retail

We present an equilibrium search model that parsimoniously rationalizes the use of auctions as a sales mechanism for new-in-box goods--a frequent occurrence in online retail markets--and analyze whether the existence of these auctions is welfare enhancing relative to a market consisting only of posted prices. Buyers have a deadline by which the good must be purchased, and sellers choose between auctions and posted-price mechanisms. As the deadline approaches, buyers increase their bids and are more likely to buy through posted-price listings. The model predicts equilibrium price dispersion even for new, homogeneous goods. Using data on one million auction and posted-price listings for new-in-box items on eBay.com, we find robust evidence consistent with our model. As predicted, bidders increase their bids from one auction to the next, equilibrium price dispersion exists, and auctions and posted-price listings coexist. Fitting the model to the data, we find that retail auctions increase total welfare by 1.8% of the average retail price if listing fees exactly cover platform costs, but reduce welfare by 2.3% if listing fees are pure profit