Search costs and equilibrium price dispersion in auction markets

- We incorporate search frictions a la Varian (1980) and others into a model of competing auctions.
- We use eBay data to show important frictions in a setting usually presumed to have minimal frictions.
- We observe an actual friction that arises from eBay׳s default search algorithm.
- We broaden scope of the price dispersion literature to include auction markets.

A leading explanation for price dispersion in posted-price markets is search costs. We incorporate this insight into a model of competing second-price auctions similar to eBay. By doing so, we extend the narrow literature on competing auctions to capture price dispersion, and grow the already large literature on price dispersion to include auctions. We provide evidence on search costs and price dispersion using data collected from eBay, identifying search costs by exploiting a discontinuity in the visibility of auctions due to eBay׳s search tool.