Bidding Frenzy: High Speed of Competitive Interaction Drives Up Bids in Auctions
The desire to win is triggered by how quickly a consumer’s bids in an auction are countered.
Research by Alberta School of Business professors Gerald Häubl and Peter Popkowski Leszczyc provides new insights into the psychological forces that drive bidding behavior in auctions. In a series of experiments, the researchers showed that how much a consumer is willing to bid for an item in an ascending-bid auction (conducted live or via the Internet, such as on eBay) is strongly influenced by what competing bidders do. In particular, seeing one’s own bids surpassed more quickly induces a greater desire to win, which in turn increases a consumer’s willingness to pay for the auctioned product.
The phenomenon of “bidding frenzy” has received much attention in the popular press. Competition among bidders in ascending-bid auctions can indeed be very fierce. It is common for the high bid to switch many times between different bidders until the ultimate winner is determined, along with his or her winning bid. Thus, potential buyers compete directly against each other, and they often update their bids repeatedly after having been outbid by someone else.
The research by Häubl and Popkowski Leszczyc is the first to examine how the intensity of the competitive interaction among bidders influences bidding behavior. Their key hypothesis was that greater speed of competitor reaction – being outbid by competing bidders more quickly – causes consumers to bid a larger amount for an auctioned product. In a series of five experiments, the researchers found compelling support for this prediction. In addition, the findings provide insights into the psychological forces that drive this effect.
“The biggest challenge we faced in conducting this research was to find a way of isolating the effect of the speed of competitor reaction on individual consumers’ bidding behavior. This inspired us to develop a fundamentally new experimental approach for pinpointing what causes what in settings with dynamic interaction among people,” said Gerald Häubl, the Ronald K. Banister Chair in Business at the University of Alberta.
The research revealed that being outbid by someone else more quickly causes consumers to perceive an auction as more intensely competitive, which in turn boosts their desire to win, ultimately resulting in an increased willingness to pay for an auctioned product. The findings also show that this effect is not due to perceived time pressure or an auction’s overall rate of progression. Moreover, while the speed of competitor reaction has a strong impact on how much consumers bid for a product, it does not influence their beliefs about its objective value or retail price.
While a smaller number of bidders who participate in an auction can also lead to the perception that the auction is more intensely competitive, the effect of speed of competitor reaction is distinct from this. Indeed, being outbid more quickly increases willingness to pay for the auctioned product irrespective of whether one is bidding against a single other bidder or a large number of them. Finally, the findings reveal that this effect hinges on direct competitive interaction with other human bidders and vanishes when the speed at which one is being outbid is determined otherwise (for instance, by a software agent).
“The more intense bidding is in an auction, the more likely it is that a buyer will be gripped by bidding frenzy,” said Peter Popkowski Leszczyc, a Professor of Marketing at the University of Alberta.
The research has important implications for anyone who participates in ascending-bid auctions. First, bidders should resist the temptation to outbid other auction participants quickly. Instead, they should try to strategically slow down the bidding process so as to “cool down” an auctions’ perceived competitive intensity, thus preventing other bidders from getting into a bidding frenzy. Bidders might also accomplish this by specifying their maximum willingness to pay in the form of proxy bid (a common feature of online auctions), such that when they automatically and instantaneously outbid someone else, this high speed of competitor reaction is (correctly) attributed to a software agent rather than a human bidder. Moreover, apart from having a cooling effect on the perceived competitive intensity of an auction, setting a proxy bid at the outset – and sticking to it – also helps consumers avoid getting caught up in a bidding frenzy themselves.
The article “Bidding Frenzy: Speed of Competitor Reaction and Willingness to Pay in Auctions” by Gerald Häubl and Peter Popkowski Leszczyc is forthcoming in the Journal of Consumer Research.
Gerald Häubl has a global reputation as one of the world’s leading experts on the psychology of consumer decision-making. He draws on his years of experience conducting laboratory experiments and integrates his research with his PhD course on Experimental Methods for Behavioral Science at the Alberta School of Business. He obtained his MSc and PhD at Vienna University of Economics and Business. Gerald is the Ronald K. Bannister Chair in Business and a professor of Marketing at the Alberta School of Business.
Peter Popkowski Leszczyc is a prolific researcher publishing in top marketing journals and in Financial Times top 50 journals. His research focuses on empirical work in auctions, and he hosts a proprietary website for running conventional- and charity-auction related field experiments. He attended State University of New York at Geneseo (BS), State University of New York at Buffalo (MBA), and University of Texas at Dallas (PhD). He currently is an Eric Geddes Professor of Business and a professor of Marketing at the Alberta School of Business.