One of the great areas of innovation in modern economics – theoretical, empirical and applied – is the economics of auctions. The theoretical insights can be traced to one of the subject’s most surprising results – William Vickrey’s Revenue Equivalance Theorem. This demonstrates the conditions under which an ascending ‘Sothebys-Christies’ auction leads to the same expected revenue as a Dutch ‘falling clock’ flower-auction format, and in turn shows that these should generate the same expected revenue as a sealed-bid auction, whether first price or second price. The burgeoning empirical work on auctions includes studies such as that of Kathryn Graddy and Orley Ashenfelter on art auctions, and Susan Athey and Jonathan Levin on timber auctions, whilst even the business world and financial markets could not ignore the applied auction architecture of British academics Ken Binmore and Paul Klemperer, which extracted a full £20 billion of value in the UK 3G-spectrum auction (albeit at the height of DotCom mania).
But, far from being the preserve of academics, auctions have in recent years entered the lives of the public at large with the rise of ebay. And in this book Ken Steiglitz provides a guided tour of the world of eBay, viewed through the lens of the modern economics of auctions. This approach allows Steiglitz to highlight both the impressive progress that has been made in the study of auctions whilst at the same time exposing how such a well-known phenomenon as eBay remains imperfectly explained by current economic thinking. In so doing he touches on issues at the heart of modern microeconomics – dare one say economic science – such as the importance of ‘behavioural’ (read, ‘non-rational’) explanations of many real-world phenomena.
What Steiglitz does well is discuss the quirks of eBay. He himself is a regular user (as an ancient-coin collector) and this allows him to comment with some authority upon the many different patterns of observed behaviour. For example in chapter 3 we are presented with some eBay bidding histories which expose, amongst other things, the practice of ‘sniping’. Sniping is the strategy of placing a bid at the last possible moment of an auction, made possible by the fixed public deadline under which eBay runs its auctions. At first glance, sniping seems like a strange strategy – eBay is close to a second price sealed-bid auction, and so we might expect the dominant strategy on eBay to be bidding one’s valuation, in which case it doesn’t seem to matter exactly when you place your bid. However, Steiglitz sets out various reasons why sniping may nonetheless be rational – which, if valid, can only be good news for the Neo-Classical economist because there can be little doubt that sniping actually happens.
For all the interest that Steiglitz provides on the subject of eBay behaviour, however, the book could be improved. The exposition of auction theory falls perhaps between two stools, neither precise enough for the expert nor sufficiently clear to the novice. Equally the exposition of standard auction theory seems to distract the author from fully addressing the really interesting issues that his study of eBay exposes. The quirks of eBay behaviour would be a perfect opportunity for some broader discussion of the role of behavioural economics and the status of rationality.
But these are qualifications. This is an interesting book, providing a fascinating insight from an important real-world auction market, and this will provide motivation to delve deeper into the subject to many a non-expert reader. The economics of auctions is an area understood by too few economists outside of academia, but if this book brings the economics of auctions to the wider professional economist audience it will have achieved its purpose. Those who know auction theory should enjoy the book, despite its deficiencies, for its rich array of real world examples, and those who don’t may be tempted to turn to a standard source. And at worst, it will help you buy (at the lowest possible price) that Manchester City football programme from 1952 you have been searching for, or dispose of your First Edition of Samuelson to potential collectors of old (pre-auction theory) economics textbooks.
Mark Williams
Director, European Competition Policy, NERA