Winners Curse: Craigslist

I am not ashamed to be one of those "low-ball bidders" who is always scanning Ebay, Craigslist, and KSL classifieds in search of that GOLDEN nugget.  Recently, I read an article about the "winner's curse," which states that many auction items are sold well above their intrinsic value.  This is often due to the fact that information is not equally known by both the buyer and seller.  If I offer a high price, I will win both high and low quality items but pay more -- on average -- than what my items are really worth.  This is known as "information asymmetry."  As a result of this knowledge, we can all constantly low-ball bid items and walk away with the deal of a lifetime on a weekly basis.

As a seller of a collectible item, we now have a problem on our hands.  How do we maximize our final selling price?  It is simple.  There is a reason you get the best deals on ads where no picture is offered, and no detailed description is available.  To get every dime out of your item, make sure to offer ample pictures, descriptions, ownership titles, letters of authenticity, etc.  An article recently published by the American Economic Association about asymmetric information revealed that eBay Motors auctions fetch an extra $80 per photo provided by the seller.  Happy Bidding/Selling!


Paulo said...

It appears buyers constantly suffer from ‘adverse selection’. They are always looking for that “Golden” nugget and as they do so they may purchase several items at a higher price than their true value. In other words, the item was not genuine or discreet. Adverse selection occurs when buyers purchase several good and poor products, hence creating an adverse selection of goods. This is due to the asymmetric information in the market place. Due to the asymmetric information between sellers and buyers, buyers take on a risk that they may not be purchasing a high quality or genuine item and this will shift the demand curve to the left. Due to the amount of low quality or fake items available this would increase supply and move the supply curve to the right. This causes prices to be lower and quantity demanded usually to be either less or around normal demanded depending on the elasticity of the market. Therefore the equilibrium will never be as good as it could be with symmetric information. I agree with Bomber that providing pictures and additional information when selling an item will decrease the amount of asymmetric information and bring the equilibrium closer to symmetric information levels

Dave Tufte said...

Bomber: 100/100
Paulo: 44/50 (I don't think you meant to use "discreet", and "market place" is one word)

This is a very cool post; thanks for digging for that tidbit from AER.

I have a correction for Bomber though: you've got winner's curse wrong. Winner's Curse is the idea that in an (first price English) auction, the winner has paid more than any other person was willing to pay. So the curse is that you have always paid too much. This is different from asymmetric information (which can also lead to paying too much), or to the whole range of situations where people pay more than intrinsic value.

Bomber and Paulo are both right, in that efforts made to reduce information asymmetry help the seller by helping the buyer justify spending more.