Experimental Evidence on the Endogenous Entry of Bidders in Internet Auctions

Abstract

This paper tests the empirical predictions of recent theories of the endogenous entry of bidders in auctions. Data come from a field experiment, involving sealed-bid auctions for collectible trading cards over the Internet. Manipulating the reserve prices in the auctions as an experimental treatment variable generates several results. First, observed participation behavior indicates that bidders consider their bid submission to be costly, and that bidder participation is indeed an endogenous decision. Second, the participation is more consistent with a mixed-strategy entry equilibrium than with a deterministic equilibrium. Third, the data reject the prediction that the profit-maximizing reserve price is greater than or equal to the auctioneer’s salvage value for the good, showing instead that a zero reserve price provides higher expected profits in this case.