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Thursday, January 24, 2008

eBay-nomics

Modern economists have assumed that people in auctions behave
rationally. Then came eBay.



In Rome, they called it calor licitantis, or "bidder's heat." If you got swept up in the passion of an auction and paid way too much for something, you could plead a form of temporary insanity, and the judges might step in and let you off the hook (and get you your money back).

Good luck finding that kind of help the next time you overbid on that used iPod on eBay. You bid for it, you pressed the button, you bought it.

The Romans knew something that modern economists lost sight of at some point: Auctions lead people to do weird things. For a long time, economists have explored and even reveled in the supposed purity of auctions, viewing them as uncannily efficient means of moving goods into the hands of people who value them the most.

In fact, studying auctions has long been a fertile subfield within economics. The late economist William Vickrey won a Nobel in economic science, in part for his work in auctions. A 1961 paper of Vickrey's detailed the elegance of so-called sealed-bid, second-price auctions, in which the winner pays the price submitted by the second-place bidder. (Among other advantages, such auctions reduce the likelihood
that a bidder will overpay for an item.) This spring, Harvard's Susan Athey, who helped British Columbia design timber auctions crucial to its economy, won the John Bates Clark Medal, given to the most accomplished economist under 40.

Now, however, economists and other social scientists are as likely to be interested in the quirks and inefficiencies of auctions -- and the irrationality of bidders -- as in their elegance. And since eBay, the hugely successful online auction site, offers a mountain of data about sellers and bidders every day, its glazed-eyed devotees are the guinea pigs for this new wave of research.

The new work -- call it "eBay studies" -- highlights the degree to which human psychological quirks, and not just supply and demand, drive auctions. Studies of eBay might ultimately help economists ensure that high-stakes auctions, like those through which the US government distributes the electromagnetic spectrum, are as efficient and fair as possible. But understanding eBay, with its $6 billion in
revenues last year, is itself no small matter.

By Christopher Shea
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