Working Knowledge
Business Research for Business Leaders
05 Jul 2006Working Paper Summaries

Empirical Tests of Information Aggregation

by Pai-Ling Yin
While neither buyers nor sellers may be certain of the worth of used goods, both may possess private information about the value. Do prices become more informative as the number of bidders grows? Using data from a sample of eBay auctions for computers, Yin looked at how and under what conditions auction prices converge to the common value of a given item. Key concepts include:
  • Ebay prices do become more meaningful as the number of bidders increases; however, there is insufficient evidence to conclude that they aggregate information as fully as they could, given the number of bidders.
  • Even partial information aggregation by eBay auction prices suggests a potential efficiency gain over one-to-one trade of used goods with uncertain common values

Author Abstract

This paper proposes tests to empirically examine whether auction prices aggregate information away from the limit. These tests are based on 1) a combination of comparative statics with respect to the number of bidders and the dispersion of information signals and 2) comparison of actual prices to predicted Nash equilibrium prices based on observed auction parameters. When applied to eBay online auctions for computers, these tests suggest that prices partially aggregate information, but do not converge to the common value. Even partial information aggregation may represent a potential efficiency gain over one-to-one trade of used goods with uncertain common values. (JEL D44, D8, L81; keywords eBay, auctions, information)

Paper Information

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