The Agony of Victory

articles
March 19 1999 3:30 AM

The Agony of Victory

Online auctions and the winner's curse.

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On the other hand, if buyers at online auctions are persistently disappointed, it's possible that after a while they'll stop bidding. It's also possible that experience will lead them to approximate "rationality," and they'll reduce their bids. Either way, sellers would find their inflated profits eroded. But auctions have survived the winner's curse for millenniums, and even the Internet is unlikely to change that.

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To be sure, not all auctions are rip-offs. Remember, there is no danger of the winner's curse if you are sure about the value of an item to you. In that situation, the auction device serves its proper purpose of putting the item in the hands of whoever values it the most. For instance, suppose you are buying a Beanie Baby for your little brother or a discounted airline ticket to Cabo San Lucas. Most folks have a pretty clear idea of how much pleasure they'll get from their brother's smiles or a few days of sand and surf. And sane consumers won't bid more than these respective pleasures are worth to them--meaning that they can't feel cheated.

The winner's curse also doesn't apply when there are many identical items being auctioned off. In those cases, where there is enough quantity available to satisfy most bidders, the going price will be set by the sensible middle of the pack rather than by the most overoptimistic extremist. The leading example of such an auction is the stock market. So the winner's curse can't explain the extravagant price of shares in eBay itself. Unless, of course, when it comes to Internet shares there is no sensible middle. If everyone's gone crazy, economic theory isn't much help.

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