Consumer Behavior in Bidding Markets with Participation Costs

Abstract

Consumer bidding is common in a wide variety of markets. An important source of friction in many markets with bidding is the cost of participation. We investigate the impact of participation costs on bidder entry and bidding behavior using incentive-compatible laboratory experiments with participation costs in the form of “bidding fees.” Instead of a standard auction, our experiments utilize the more tractable name-your-own-price (NYOP) setting. We find that both entry frequencies and bid magnitudes exceed the predictions of a risk-neutral benchmark model. Although the bids we observe can be rationalized with a standard risk-averse expected utility model, the entry decisions cannot, because more than half of our subjects enter when a risk-neutral bidder would not. We identify two important moderators of such “excess entry” — experience with the task and reduced task difficulty due to a decision aid. In contrast to their effect on entry decisions, experience and difficulty have no effect on bid magnitude, which suggests figuring out the bid amount is easier than deciding whether to enter. We also apply our data to examine the profitability of two-part tariffs in NYOP settings, and we find such a pricing strategy can only be profitable when consumers are relatively inexperienced and when they do not have access to an effective decision support tool.