Tuesday, January 29, 2008

Consumer surplus on eBay 

I held many jobs while in college, one of which was for an auctioneer. In any auction, as you know, you pay not your reservation price but the reservation price of the next-highest bidder plus whatever the increment was. The difference between these is your consumer surplus (if you are the winner.) One thing in a live auction you observe are auctioneers trying hard to keep that increment as large as possible -- the larger the increment, the more of that surplus that is transferred from buyer to seller. Inexperienced auctioneers tend to reduce the increment more quickly, based on my own experience. (I briefly contemplated a career as auctioneer, but Col. King just sounds strange.)

The New York Times has a blog post on the consumer surplus earned by eBay and its consumer surplus, which appears to have reached $19 billion in 2007. (h/t: Mark Perry.) The average winning bid is $4 below the winner's reservation price, and the average auction price is $14. One think that has long bothered me about eBay is the inability of the seller to control the increments at which eBay moves up the bidding. To work well, eBay has to be attractive to sellers, since it's their products that bring buyers to the website. You would think eBay would have some interest in allowing sellers to capture more of that surplus. Perhaps this is why more sellers are interested in a fixed-price sale (towards which eBay is moving its business strategy.) Controlling the increment on the auction might make that format more attractive still.