Ask Prices, Offers, and Time to Sale in an Online Exchange

I. INTRODUCTION In this article, we consider the role served by the ask price posted by sellers in an online exchange for used computers. The functional role served by the ask price in this exchange is similar to that in other bilateral exchange settings: the ask price is not binding and essentially serves as a starting point for negotiations. Furthermore, every offer that we observe by buyers lies well below the ask price. This type of bargaining institution is common in online marketplaces and also in markets for used cars, housing, and goods sold through want ads placed in newspapers. The general finding of empirical literature examining these other markets is that ask prices convey information. A high ask price may indicate a desire by the seller to hold out for a higher offer. In such a setting, ask price dispersion may arise if sellers trade off higher prices against the likelihood of making a sale. High ask prices will then lead to higher sale prices on average but longer time on the market. The standard justification for the inverse relationship between ask prices and time on the market is that a seller asking a high price will receive fewer offers if search by buyers is costly. Most of the existing findings in support of this view have focused on real estate markets. As an empirical matter, it is not clear that ask prices should play a similar role in the online setting that we examine. Although the notion that sellers have differing reservation prices seems plausible, if the market is characterized by perfect information and costless search, then ask prices will serve no functional role. This is important because there is a general anecdotal view that online markets serve as sufficiently effective mechanisms for information transmission that search is costless. In such a setting, an initial ask price posted by the seller would be irrelevant. One caveat to this view is that although information is readily available online, it may be costly to process. The used computers sold on this exchange are complex products that differ on a number of dimensions. Viewing the large amount of information available and forming an estimate of willingness to pay in such a situation is a nontrivial task. Though the cost in terms of time and effort required to process this information does not fall as neatly within the imperfect information paradigm as does the housing market, it is clearly analogous. The search costs involved in visiting and walking through a house for sale are substantial, but relative to the value of the house they may be no larger than the costs of viewing and assessing the characteristics of a used computer. It is possible then that the immediate access to information online may not eliminate search costs. One contribution of our research, therefore, is an assessment of the extent to which online markets can be thought of as search markets. Our approach is to see whether the relationship between ask prices, offers, and time to sale on the exchange is similar to that in other markets characterized by costly search. Our data differ in some key ways from that available in more traditional settings. For example, data regarding the number of offers a given property receives are rarely available in housing markets. Nor, in many cases, is the sequence of offers for a given property observable. In our case, we observe the number of offers made and the level of each offer. A disadvantage of our data is that we do not observe final transaction prices, because once computers are sold they are removed from the publicly available listings on the exchange. Thus we cannot directly estimate the relationship between ask prices and sale prices. We can, however, estimate the relationship between the ask price and the level of the highest outstanding (i.e., rejected) offer that the computer received. This allows us to test the implication that sellers with high ask prices are more likely to reject offers of a given level. …