Managing Bidder Learning in Retail Auctions
(A2024-118667)

AUTHORS

Simon Schulten, University of Cologne; Paul Schäfer, University of Leicester

ABSTRACT

It is a common intuition that consumers will learn not to fall for behavioral pricing over time. Profit maximizing firms, however, have an incentive to undermine such learning. We study consumer learning and the firm’s response in a multi-unit descending price auction with a simultaneous fixed price offer. In our panel of 8m bids by 280k bidders, consumers often bid more than the fixed price. Depending on competing bids, an overbid can lead to paying more than the fixed price (overpaying). Overpaying is likely to affect consumer learning by making overbidding payoff-relevant. Indeed, bidders who overpay subsequently overbid less often and have higher attrition compared to bidders who similarly overbid but did not overpay. We show the firm loses money due to consumer learning and how the firm improves at managing consumer learning using two different strategies. We discuss identification of the reduced form effects and estimate a three-type structural model of bidder learning.