Question

In: Economics

In an auction, potential buyers compete for a good by submitting bids. Adam Gallinsky, a social...

  1. In an auction, potential buyers compete for a good by submitting bids. Adam Gallinsky, a social scientist from NWU, compared eBay auctions in which the same good was sold. He found on average that, the higher the number of bidders the higher the sales price. For example, in two separate auctions of identical IPods, the one with the higher number of bidders brought the higher sales price. According to Gallinsky, this explains why smart sellers set absurdly low opening prices (the lowest price the seller will accept), such as 1 cent for a new IPod. Use the concept of consumer and producer surplus to explain this reasoning.

Solutions

Expert Solution

Ans) At the higher sales price, seller received the greater producer surplus. So Galinsky’s observation that a larger number of bidders results in a higher sales price which means that a seller will want to take actions that rise the number of bidders for her good.The process of to do this is to set a lower opening price. When the opening price is low, the seller is authorizing more of the total surplus to be accessible to the winning bidder at the beginning of the auction. A potential buyer is more likely to bid if the opening price is low because he believes he can get a massive amount of share of the total surplus (that is, a large amount of consumer surplus) if he wins. If no one else bids, the bidder will indeed get that large amount of consumer surplus. But a low opening price also attracts other bidders, which, on average, increases the selling price and delivers more of the total surplus to the seller.


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