The Role of Buyer Reputations in Auctions
Lead Research Organisation:
Royal Holloway University of London
Department Name: Economics
Abstract
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Publications
Engelmann D
(2023)
Second-chance offers and buyer reputation systems: theory and evidence on auctions with default
in The RAND Journal of Economics
| Description | The role of seller reputations in on-line auctions is well established in the literature. Negative feedback deters future buyers. Buyer reputations have not been correspondingly explored. We study how a buyer's reputation for defaulting affects behaviour in second-price auctions, where after a default by the winning bidder the good is offered at the same price to the runner-up bidder (such as on eBay). This feature characterises a number of economic settings with sealed bids, such as housing markets and procurement tenders. Our theoretical model shows that systems for reporting buyer reputations lower the seller's revenue and reduce efficiency. When a bidder has a reputation for defaulting, other bidders lower their bids. The expected selling price decreases, and the good is not always allocated to the potential buyer with the highest valuation. We find support for this theoretical effect in laboratory experiments. Interestingly, eBay has recently changed its system to remove information on buyer reputation. While sellers would benefit from limiting information about buyer reputation, we find that they will not generally wish to exclude a bidder (with a reputation for defaulting) from the auction. Consequently, a bidder may find it profitable to gain a bad reputation. The higher probability of winning (as other potential buyers lower their bids) and lower expected price when winning compensate for the fact that in the event of a default the bidder loses a valuable opportunity. In our experiments we find evidence that some participants indeed strategically acquire a reputation for defaulting. |
| Exploitation Route | Our results are applicable to on-line auctions, for the design of reputation systems and rules on banning defaulting bidders. Our results have broader impacts to, for example, government procurement, where bidders may strategically develop reputations for default or not worry sufficiently about default. A possible example the housing market, where prospective buyers reveal their valuations by their offers, although defaults (failure to complete by the winning bidder) are common. |
| Sectors | Digital/Communication/Information Technologies (including Software),Other |