The Impact of Reputation and Promotion on Internet Auction Outcomes: Evidence from Huuto.net

Abstract

Internet auctions have become increasingly popular in the 21st century. However, asymmetric information induced issues, such as the inability to trust the seller and product quality uncertainty, might discourage the buyers' willingness to bid according to their true valuations. In order to alleviate trust issues, sellers are able to build an online reputation through successful online transactions. The purpose of this Master's thesis is to explore the impact of seller's reputation and chosen promotion methods on auction outcomes in Finnish Huuto.net online auction website.

The fundamental concepts of auction theory, such as valuation models, the basic four auction types, the revenue equivalence theorem and optimal auctions are introduced. Signaling theory is discussed in addition to the bidding mechanisms and reputation systems of internet auctions. The recent literature considering the impact of a seller's reputation and promotion methods on auction outcomes is reviewed. The hypotheses set to be tested are derived from the recent empirical studies and auction theory. The statistical method used in the tests of hypotheses is multiple linear regression analysis. The dataset analyzed in this study consists of 227 auctions of iPhone 4S 16 GB mobile phones posted up for auction by 138 individual sellers.

The main finding of this study is that the sellers who have acquired a costless identification from Huuto.net achieve a hefty increase in the final sales price. It also turns out that sellers who have not established an online reputation experience a steep decline in the realized closing price of the auction. The impact of negative feedback is significant as well; the increase of negative feedback points decreases the final sales price. Purchasing display-enhancing promotional options does not increase the price or probability of sale. In short, establishing reputation, avoiding negative feedback and acquiring identification pays off. The promotional options are not worth the cost.