Allocative Efficiency Considerations in Online Auction Markets

Allocative inefficiencies in online auction markets can result in the loss of revenues for sellers. It can also cause frustration for buyers who fail to win an item despite placing bids higher than other winners. The main contention of this work is that allocative inefficiencies present arbitrage opportunities, though not strictly in the traditional financial market sense, where risk-free profits are guaranteed. We develop a set of efficiency criteria to evaluate the auction activity of new and identically described items. Two principles, seller arbitrage and buyer arbitrage, are developed. These principles can be employed to evaluate the price behavior of temporally proximate auctions, and generate a useful benchmark to make allocative efficiency evaluations. Our empirical evidence suggests that arbitrage opportunities are present in a spectrum of online auctions. An empirically verifiable test of auction market allocative efficiencies is the major contribution of this research.