Discussion Paper

Selling a Dollar for More Than a Dollar? Evidence from Online Penny Auctions

May 30, 2013 | Zhongmin Wang, Minbo Xu


Online penny auctions, emerged recently, are seen as an adaptation of the famous dollar auction and as "the evil stepchild of game theory and behavioral economics." We use the complete bid and bidder history at a website to study if penny auctions can sustain excessive profits over time. The overwhelming majority of new bidders lose money, but they quit quickly. A very small percentage of bidders are experienced and strategically sophisticated, but they earn substantial profits. Our evidence suggests that penny auctions cannot sustain excessive profits without attracting a revolving door of new customers who will lose money.