Modeling the Impacts of Online Auction via eBay on Economic Welfare

Abstract

This paper calculates consumer's surplus and producer's surplus created by online auction. It includes 100 auctions completed via eBay. The consumer's surplus is calculated by the difference between the market price outside the auction and the hammer price in the auction. The producer's surplus is determined by the gap between the hammer price and the minimum bid. It discovers that the summation of consumer's and producer's surpluses which constructs the economic welfare exceeds the total value of hammer prices around 1.59 times. The value of the economic welfare is $74 billion in 2007 and $121 billion in 2013. The growth of economic welfare is around 8.62% per year. Additionally, producer's surplus surpasses consumer's surplus which means that online auction is the market for sellers rather than for buyers. The study also finds the determinants of both consumer's surplus and producer's surplus using Tobit model. The modeling reveals that the number of bidders significantly reduces the consumer's surplus but insignificantly raises the producer's surplus. The market price outside the auction raises the producer's surplus. The reduction of $1 of the minimum bid per piece reduces the consumer's surplus by $0.09 billions but increases the producer's surplus by $13.5 billions for the whole auctions in 2014. Therefore, a good strategy to boost the economic welfare created by online auction is to set the starting price low, sell valuable items and keep the number of bidders considerably limited.