Hassle Costs in Online Auctions

The views expressed in this article are the sole responsibility of the authors and cannot be attributed to Compass Lexecon or any other parties.

Abstract

Online auctions have declined in popularity, often due to their high transaction costs. This paper focuses on one such cost: the hassle cost of bidding in often prolonged online auctions. We develop a structural model of ascending auctions with costly bidding that resembles a war of attrition. We show that even in private value settings, bidders strategically lower their bids to avoid hassle. Using data from a large online auto auction platform, we estimate that the average winner incurs hassle costs equivalent to 1.7% of the vehicle's sale price, while sellers lose 5.0% in revenue due to bid-shading. Counterfactual simulations suggest that higher reserve prices can limit unproductive bidding and partially offset the loss.