Running Up the Bid: Modeling Seller Opportunism in Internet Auctions

Although the Internet is great for transferring information, transactions in Internet auctions have a greater information asymmetry than corresponding transactions in traditional environments because current auction market mechanisms allow the seller to remain anonymous and to easily change identities. Buyers must rely on the seller's description of a product and ability to deliver the product as promised. Internet auction environments make opportunistic behavior more attractive to sellers because the chance of detection and punishment is decreased. In this research, we examine auction data to see the effect of opportunism in the online auction environment. Introduction E-commerce (EC) offers a variety of new business models, such as long-lasting auctions or 24-hour per day automated order taking. These new models are designed to generate and sustain revenue by taking advantage of the unique characteristics of the World Wide Web. Though the trade media has viewed EC as "the next big thing," its growth has been below expectations. Most companies have Web sites to provide information, but only 4% of organizations currently generate revenue using EC technology, up from 3% in 1998 (Littlewood 1999), implying low customer demand for EC services from most customers. Many media analysts attribute the lower-than-expected EC growth to low levels of trust among consumers (Rankin 1999). Many observers have written about how EC benefits the consumer because of reduced search costs (Bakos 1997; Choudhury 1998). However, what needs to be better recognized by the research literature is how EC opportunism is facilitated by an increase in information asymmetry between the online buyer and the online seller. Economics defines information asymmetries as instances in which there is knowledge that one party has and that another other party lacks in a variety of decisionmaking settings (e.g., production, investment, resource allocation, contracting, and so on). Information asymmetries often lead to various kinds of problems in these settings, including inappropriate decisions and outcomes, unfair exchanges of value, and loss of social welfare. They also can occur in sales transactions, where buyers and sellers are involved. The asymmetry in information can occur with respect to knowledge about product quality or knowledge about behavior that may occur even after the sale. As a result, information asymmetries can lead to transactions in which only one side benefits. They can also lead to fraud, cheating, misrepresentation of self or product, or other moral hazards benefiting one party in a transaction at the expense of another (Tirole 1988). Although EC buyer behavior has been investigated (Lee 1998), less work has been done to investigate changes in seller behavior, especially in Internet auctions. In this research, we propose and test a model that shows how sellers in Internet auctions behave in the absence of identification, personal contact, and a higher uncertainty on the part of the buyer about the product. We explore the following research questions: • Why and how does the increase in information asymmetry brought about by Internet auction transactions change seller behavior? • How does the buyer in an Internet auction respond to this increase in information asymmetry? • How does information asymmetry affect prices in online auctions, and social welfare, more generally? We employ a software agent to gather data from online auctions, extending prior work by Kauffman, March, and Wood (1999). We analyze this data to show how Internet auction sellers react to the customer when information asymmetry increases.