Selling a dollar for more than a dollar? Evidence from online penny auctions

- Penny auctions are seen as an adaptation of the famous dollar auction.
- We present evidence that penny auctions cannot sustain profits in the long run.
- Penny auctions profit from a revolving door of new bidders.
- Penny auctions lose money to experienced bidders as a group.
- Bidder earning is positively related to bidders' strategic sophistication.

Online penny auctions, emerged recently, are seen as an adaptation of the famous dollar auction and as “the evil stepchild of game theory and behavioral economics.” In this paper, we use the complete bid and bidder history at such a website to show that penny auctions cannot sell a dollar for more than a dollar in the long run because of bidder learning across auctions and bidder heterogeneity in strategic sophistication. The website we study profited from a revolving door of new bidders but lost money to experienced bidders as a group because of the existence of experienced and strategically sophisticated bidders who profit from the website.