Adverse Selection for Luxury Goods in Online Auctions

Abstract

Online auction marketplaces such as eBay are susceptible to adverse selection. Due to information asymmetry between buyers and sellers, buyers of luxury goods from online auctions face uncertainty, especially because they are unable to determine the authenticity of goods sold in these marketplaces. Using data from completed auctions on eBay, this study confirms that adverse selection exists for luxury goods in online auctions. Institutions, such as authenticity money-back guarantee, do not effectively mitigate the adverse selection problem. The results also show that sellers tend to set up a reserve price to protect themselves from adverse selection when they choose a low starting bid. However, reserve price auctions for luxury goods result in a lower closing price and such a protection does not economically benefit the sellers. Alternatively, when sellers choose a high starting bid to lower the risk of adverse selection, they tend to offer a buy-it-now price, and the buyout option positively affects the closing price. The implications of our findings for research and practice are also discussed.

KEYWORDS:

• adverse selection
• electronic markets
• information asymmetry
• lemons market
• luxury goods
• online auctions
• transaction cost
• uncertainty

Notes

Note: N = 1,606; reserve price set, 152; buy-it-now price set, 479; money-back guarantee, 435; items described as brand new, 190.

Note: 49 percent of sellers have 0 negative feedbacks, 15 percent of sellers have 1 negative feedback, 10 percent of sellers have ≥2,342 positive feedbacks, 30 percent of sellers have ≥715 positive feedbacks, and 50 percent of sellers have ≥240 positive feedbacks.

Note: 1. log of closing price/retail price; 2. log of retail price; 3. log of seller positive ratings; 4. log of seller negative ratings; 5. log of whether authenticity guarantee is offered; 6. log of whether buy-it-now is set; 7. log of whether reserve price is set; 8. log of start bid; and 9. log of item condition (used or brand new).

Note: 1. log of closing price; 2. log of retail price; 3. log of seller positive ratings; 4. log of seller negative ratings; 5. log of whether authenticity guarantee is offered; 6. log of whether a buy-it-now price is set; 7. log of whether a reserve price is set; 8. log of start bid; and 9. log of item condition.