In an auction, potential buyers compete for a good by submitting bids. Adam Gali
ID: 1168385 • Letter: I
Question
In an auction, potential buyers compete for a good by submitting bids. Adam Galinsky, a social psychologist at Northwestern University, compared eBay auctions in which the same good was sold. He found that, on average, the larger the number of bidders, the higher the sales price. For example, in two auctions of identical iPods, the one with the larger number of bidders brought a higher selling price. According to Galinsky, this explains why smart sellers on eBay set absurdly low opening prices (the lowest price that the seller will accept), such as 1 cent for a new iPod. Use the concepts of consumer and producer surplus to explain Galinsky’s reasoning. 5 points In an auction, potential buyers compete for a good by submitting bids. Adam Galinsky, a social psychologist at Northwestern University, compared eBay auctions in which the same good was sold. He found that, on average, the larger the number of bidders, the higher the sales price. For example, in two auctions of identical iPods, the one with the larger number of bidders brought a higher selling price. According to Galinsky, this explains why smart sellers on eBay set absurdly low opening prices (the lowest price that the seller will accept), such as 1 cent for a new iPod. Use the concepts of consumer and producer surplus to explain Galinsky’s reasoning. 5 pointsExplanation / Answer
Consumer surplus refers to the difference between the price that consumer is willing and able to pay for a good or service and the price that he or she actually pays for that good or service. In other words, consumer surplus acts as monetray gain made by the consumer in purchase of a good or service.
Producer surplus refers to the difference between the price at which seller is willing to provide a good or service and the price at which he or she actually provides that good or service. In other words, producer surplus acts as monetary gain made by the producer in selling of a product.
Smart sellers on eBay auctions generally set absurdly low opening prices for quality goods such as new iPods because they knew that people would be willing to pay much higher price than the opening prices they are asking.
In other words, by setting low opening prices, smart sellers create a large consumer surplus for the buyers inducing large number of buyers to bid.
As number of buyers increase, bid amount also tends to increase (as stated in question itself). This increase in bid amount or sale price increases the producer surplus thereby creating larger profit for sellers.
Thus, low opening price by creating a larger consumer surplus in artificial manner enables the smart sellers to garner large producer surplus and that's why they set absurdly low opening pirces for quality goods such as new iPod.
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