Are eBay Auctions Rational?
from the check-the-data dept
There's been a trend in the last few years to suggest that a new group of economists are somehow "disproving" the traditional "neoclassical" basis for economics: that of "the rational person." A recent article in The Nation is the latest in a long line of articles claiming that there's a growing group of economists going against the grain. The problem, however, is that almost every time you look at the details, they don't actually disprove the rational person. They simply point out that the rational person is rational based not just on data and dollars -- but on many other things, including social conventions and peer pressure. That is, when someone makes a "bad" decision in terms of dollars due to peer pressure, that doesn't mean the person is irrational -- it simply means at the instant of the decision they valued the approval of their peers more than the dollar value lost due to the decision. Slate is running an article asking whether or not eBay auctions are rational, looking at some research by an economist who has been studying online auctions for many years. It notes that classical auction theory would suggest that having a "secret" reserve price (the lowest price at which the seller will actually accept the bid) will do better than one where the reserve price is open, because it reinforces the idea that others are interested in the product as well and bidding will move upwards. However, the research showed the opposite. An open reserve price (so you can only start bidding at the reserve price) tends to get more interest. Of course, this doesn't actually answer the question of whether or not eBay auctions are rational. All it shows is that bidders value the certainty of knowing what the reserve price is, and do not value the uncertainty of a secret reserve price that could mean wasted effort in a particular auction. That's hardly irrational.