Law of One PriceEconomics Experiment

Keith Salas and Sean Lynam

Our Question:

•Does the law of one price hold on Ebay?

Law of One Price

•“In an efficient market all identical goods must have only one price.”

•Defines a market as a geographical area, within which the same things are sold for the same price at the same time, allowance being made for transportation cost

Ebay

•Everybody knows what Ebay is

Why Should the Law of One Price Hold on

Ebay?•All new products are the same

•Only difference is S&H

•Buyers have similar valuations for products

•Very competitive, many buyers and sellers

The Setup•4 Sets of 4-8 auctions, 1-5 minutes

in length

•All buyers have same valuation

•Auctions come and go at different times

•Buyers don’t know when a new auction will enter, but do know when it ends

Ebay Love

•Trying to imitate Ebay

•Lots of auctions for the same products starting and stopping

Round 1

3 3 3 3

2 2 2 2 5 5 5 5x

1 1 1 4 4 4 4

Round 1 Results

Round 2

3 3 3 3 6

2 2 2 2

1 1 1 1 4 4 4

Round 2 Results

Round 3

4 4 7 7 7

2 2 2 5 5 5 8 8x

1 1 3 3 3 6 6 6

Round 3 Results

Round 4

3 3 3

2 2 2 4

1 1 1 1 1

Round 4 Results

Findings and Interpretations

•Law of one price did not hold in our experiment

•The first auction of each round was very close to the valuations of the buyers

•Fewer available auctions = more bidders in each auction = higher sale prices

Findings

Findings Part Deux

•Auctions that started and ended in the middle of the rounds tended to have lesser sale prices

•Got lost in the mix

Interpretations

•Ebay sellers: when to end auctions?

•High traffic versus low traffic of Ebay users

•High traffic: supply greater than demand

•Low traffic: demand greater than supply

If we had to do it again...