Auction Hosting Site Pricing and Competition

This paper derives the analytics of seller and buyer participation in an auction hosting site, characterizes optimal hosting site pricing and investigates the nature of competition between two auction houses or hosting sites that are differentiated in the eyes of the bidders. The auction sites earn revenue by setting positive listing fees, trading off the increased revenue per seller from higher fees with the revenue reduction from the loss of sellers. The reduction in the number of sellers participating in a site has feedback effects, as it affects the number of bidders who would choose to visit that site. The sellers set the reserve in each sale to maximize their revenue. Unlike most prior models of auction site competition, buyers have preferences for bidding in the two sites. These preferences may be driven by interface layout, prior experience with a site (which makes it less costly in terms of transaction costs to buy from that site), customer service experience, transaction reliability and reputation of sellers, and — more generally — anything that would fall under the rubric of site loyalty. Different buyers have different preferences for site interface and different experiences, resulting in some measure of horizontal differentiation between the sites. This differentiation between the two sites implies that even if they both set the exact same rules and pricing policies, some buyers would strictly prefer to purchase from one, while others would strictly prefer to purchase at the rival site. Though preference for the two sites need not be symmetric, differentiation results in market power and positive economic profits for both sites. We start by the careful analysis of the monopoly case, in which the second of the two firms is absent. In the monopoly case, factors such interface layout and prior experience that would lead to site heterogeneity under duopoly, result in bidder heterogeneity with respect to participation costs. We then consider the special features involving the equilibrium under duopoly, noting that many of the features of the equilibrium under monopoly remain valid under duopoly as well.