Internet Trading Mechanisms and Rational Expectations

This paper studies an internet trading mechanism similar to the one described in (Peters and Severinov 2001) in a market where traders values are interdependent. Conditions are given for which this mechanism has a perfect Bayesian equilibrium which supports allocations that are the same as the allocations supported by a rational expectations equilibrium. In particular, this equilibrium supports allocations that are ex post efficient. We show how to construct the rational expectations equilibrium belief function from posterior beliefs at terminal information sets of the internet trading game. The mechanism is also compared to a double auction. This paper models competition in an auction market where buyers’ and sellers’ valuations are interdependent. Rather than having sellers compete in reserve prices, as has been commonly assumed in the previous literature, we assume that the competition occurs in an internet auction market similar to the one studied by (Peters and Severinov 2001). Sellers cannot commit to public reserve prices, but they are free to bid in any auction (including their own) at any time during the bidding process. We give conditions that resemble those found in a very large market, such that there is an equilibrium for the internet trading mechanism for which trade is post efficient and occurs at a uniform price. Internet auctions provide a rich source of readily accessible data on bidder behavior in auctions. One way to exploit this is to use the outcomes in the different auctions as separate data points that can be used to test particular predictions of auction theory. One of the main implications of (Peters and Severinov 2001) is that a market based approach to the data may be more effective than an auction theoretic approach. So for example, the price that prevails in some sellers’ internet auction will vary with aggregate demand and For example (McAfee 1993, Peters and Severinov 1997). For example, (Bajari and Hortacsu 2002) measure the winners’ curse in ebay auctions by measuring the impact that the number of bidders has on the trading price in eBay auctions.