An Integrated Model for Whether, Who, When, and How Much in Internet Auctions

A general parametric modeling framework for bidding behavior in Internet auctions is developed and it is demonstrated that this general (yet parsimonious) model captures the key behavioral aspects of bidding behavior.

Abstract

We develop a general parametric modeling framework for bidding behavior in Internet auctions. Toward this end, we incorporate and model simultaneously four key components of the bidding process under our integrated framework: Whether an auction will have a bid at all, (if so) who has bid, when they have bid, and how much they have bid over the entire sequence of bids in an auction. This integrated framework is based on a single latent time-varying construct of consumer willingness to bid (WTB), which bidders have and update for a particular auction item over the course of the auction duration. Our modeling approach is also based on a simple yet very general bidding premise: The observed bidder's latent WTB at a specific bid is greater than the outstanding bid; yet, WTB is unconstrained for all other potential bidders. In this manner, we impose no structural assumption on bidder rationality or equilibrium behavior; instead, deriving our model using a probabilistic modeling paradigm. We describe in detail the advantages that our reducted-form approach allows us, and the limitations such an approach also entails. Using a database of notebook auctions from one of the largest Internet auction sites in Korea, we demonstrate that this general (yet parsimonious) model captures the key behavioral aspects of bidding behavior. Furthermore, substantively, through a data-windowing procedure to assess the set of potential bidders for a given auctioned item, we provide a valuable tool for managers at auction sites to conduct their customer relationship management efforts which require them to evaluate the goodness (whether) of the listed auction items and the goodness (who, when, and how much to bid) of the potential bidders in their Internet auctions.