Seller Strategies For Differentiation in Highly Competitive Online Auction Markets

Seller Strategies for Differentiation in Highly Competitive Online Auction Markets
JESSE BOckStEDt aND kIM Huat GOH

Jesse Bockstedt is an assistant professor of information systems and operations management in the School of Management at George Mason university. He received his Ph.D. in business administration with specialization in information systems from the carlson School of Management, university of Minnesota, twin cities. His research interests include electronic commerce and online consumer behavior, information goods, the impact of new technologies on consumers and markets, and technology evolution. His work has appeared in MIS Quarterly, Information Systems Research, International Journal of Electronic Commerce, Information Technology and Management, IEEE Transactions on Knowledge and Data Engineering, and Communications of the ACM. He regularly presents his research at conferences and workshops, including the Workshop on Information Systems and Economics (WISE), Workshop on Information technology and Systems (WItS), INFORMS conference on Information Systems and technology, and the Hawaii International conference on Systems Sciences (HIcSS) where he was nominated for a Best Paper award in 2005. kim Huat GoH is an assistant professor in the Division of It and Operations Management in the Nanyang Business School at Nanyang technological university. He received his Ph.D. in business administration with specialization in information systems from the carlson School of Management, university of Minnesota, twin cities. His research interests include examining the value of It in financial institutions, distribution strategies for information goods, strategic analysis of electronic markets, and consumer behavior in online auctions. His research has been published in MIS Quarterly and presented at conferences, including the International conference of Information Systems (IcIS), Hawaii International conference on System Sciences (HIcSS), Workshop on Information Systems and Economics (WISE), and INFORMS conference on Information Systems and technology where he was recognized as the runner-up for Best Doctoral Research Paper award in 2006. aBstract: We explore the issue of seller differentiation in competitive auction environments, where most sellers have a high percentage of positive feedback. analyzing a set of eBay auction listings for identical products, we find evidence that the use of visibility-enhancing and quality-signaling discretionary auction attributes affects auction outcomes throughout the auction process (i.e., listing views, bids, and price premiums). We also find strong evidence that the number of reputable sellers in an auction marketplace moderates the effects of these discretionary attributes on auction outcomes. Specifically, as auction environments become more competitive, these attributes become more effective tools for differentiation, whereas seller feedback scores become less effective. Furthermore, sellers appear to select their strategies for employing these discretionary attributes based on both their prior experience and the
Journal of Management Information Systems / Winter 201112, Vol. 28, No. 3, pp. 235267. 2012 M.E. Sharpe, Inc. 07421222 / 2012 $9.50 + 0.00. DOI 10.2753/MIS0742-1222280307
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number of experienced reputable sellers in the market. these findings suggest that in addition to relying on feedback scores, online sellers must take a more strategic approach in the selection of discretionary attributes in their auction listings. key words and pHrases: differentiation, e-auctions, online auctions, seller differentiation, signaling theory.
recent researcH Has sHown tHat online auction markets have become concentrated with highly reputable sellers, that is, sellers who have very high percentages of positive feedback [13, 16], and that feedback mechanisms in online auctions may, as a result, become less effective tools for differentiation. this is likely to be especially true for high-value auctions where buyers are less willing to trade with lower-reputation sellers. the transition to a highly competitive environment represents a change in the dynamics of competition among sellers in online auctions, and little research has explored how seller differentiation strategies have co-evolved in this new context. In online auctions and electronic marketplaces, feedback scores have been used as the primary measure to establish a sellers reputation in information systems (IS) research. Much of this research has shown that feedback, along with other auction characteristics, significantly affect price premiums (e.g., [43, 44]). In traditional markets, firms and sellers differentiate themselves along many dimensions, including brand, experience, price, customer satisfaction, and service. In online auction markets, however, buyers determine price and sellers are limited to the mechanisms provided in the specific electronic marketplace for signaling quality and brand. Sellers in online auctions cannot rely on the typical marketing strategies employed by more traditional retailers to differentiate themselves. as online auction marketplaces become increasingly competitive, the effectiveness of feedback scores is likely to diminish and sellers will rely more on auction features and options to signal quality and increase the visibility of a listing. a recently published research agenda argues that more research is needed on the role of trust and reputation in online markets [22]. Despite the many studies exploring the role of feedback and auction characteristics in determining the results of an auction (for a review, see [14] ), no research to date has explored how the concentration of experienced reputable sellers in an auction environment moderates the effects of discretionary auction attributes on auction outcomes. Furthermore, there has been no research that identifies and analyzes the performance of common seller differentiation strategies using discretionary attributes in such environments. In this paper we address this need for further analysis on seller differentiation strategies in these new auction environments by performing a comprehensive empirical analysis using a unique data set of approximately 12,000 auctions of identical products. We use unsupervised learning techniques to discover the basic types of differentiation strategies that sellers employ in online marketplaces, based on their adoption of visibility-enhancing and quality-signaling discretionary auction attributes. Next, we
DIFFERENtIatION IN HIGHly cOMPEtItIVE ONlINE auctION MaRkEtS
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quantify the effect of each discretionary attribute on the price premium while controlling for selection bias introduced through unsuccessful auction listings (an empirical consideration that has not been incorporated in previous studies). We then analyze the moderating effects of the reputations of competing sellers in an auction market on a sellers choices of differentiation strategy and the auction outcome. the results of our analysis provide new insights on the nature of competition among sellers in contemporary online auction marketplaces. We find evidence that the presence of reputable competing sellers in the marketplace significantly moderates the effects of discretionary attributes and feedback measures on price premiums. Specifically, in markets with significantly higher proportions of experienced reputable sellers, discretionary attributes have a greater impact on price premium; however, feedback scores do not have a significant effect. We also find evidence that sellers use of visibilityenhancing attributes is positively associated with marketplace characteristics, such as the reputations of and the increased use of similar visibility-enhancing attributes by competing sellers. Finally, we find evidence that the level of selling experience is positively associated with increased use of some discretionary attributes. the remainder of this paper proceeds as follows. In the next section we provide a review of the related literature. then, we describe our research data and present the results of a cluster analysis that identifies basic seller strategies and informs our formal econometric analysis. Next, we discuss the analysis and results of our in-depth econometric investigation of the moderating effects of the reputations of competing sellers in an auction market on sellers choices of differentiation strategies and auction outcomes. then, we discuss the contributions of this research, implications, limitations, and potential extensions. Finally, we provide concluding remarks.
theoretical Foundations
we review two main streams of researcH; we first discuss recent research on the potential effects of an increasing concentration of reputable sellers in online auction marketplaces, then we examine the literature on the effects of auction attributes on consumer behavior and auction outcomes, specifically focusing on the effects of visibility-enhancing and quality-signaling auction listing characteristics.
Increasing concentration of Reputable Sellers

In traditional markets, price often acts as the main indicator of competition among sellers, where more efficient sellers are able to price products lower to attract customers away from competitors. In the online auction environment, however, prior research has focused on competition among sellers driven more commonly through reputation signals, since price is determined through the auction process. a sellers reputation is generally defined as a perception of a sellers past actions and future prospects [48], which describe a sellers overall appeal to consumers. In online auction research, reputation is typically the key indicator of trust [38, 42, 55]. Ba and Pavlou [3] define trust as the buyers belief that a transaction with a seller will occur
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Figure 1. Distribution of Positive Feedback Percentages
in a manner consistent with expectations. the reputations of sellers in online auctions are typically measured by feedback ratings provided by other market participants, the buyers, and these ratings can provide signals that reduce information asymmetry and build buyers trust in sellers [15, 23, 44]. Feedback ratings are commonly presented as a percentage (i.e., percentage of positive feedback from all ratings) or as a count of total positive feedback ratings received, or both. the former measures the customer satisfaction percentage and the latter measures the positive sales experience of the seller. One of the most researched areas in online auctions is the effect of positive and negative feedback ratings on auction performance (e.g., [15]). Most research has shown that positive feedback provides price premiums to reputable sellers (e.g., [44, 45]), and negative feedback ratings reduce sales probability and final price (e.g., [19]). Pavlou and Dimoka [43] extended this research stream to show similar effects of feedback text comments. Recently, however, IS researchers have recognized that there is an increasing number of reputable sellers in online auction markets [13, 16], and as a result, the marketplace has become more competitive for sellers. the popular press has raised the question of whether individual sellers can still compete in online auctions because of the overwhelming presence of power sellers and small businesses [37]. Interestingly, we have observed that the increased number of reputable sellers is dramatic when considering a sellers reputation based on the percentage of positive feedback ratings received. However, there still appears to be a significant amount of variability in the positive experience of sellers in the marketplace, as measured by the count of positive feedback ratings received (see Figures 1 and 2 for distributions of feedback scores in our sample of approximately 12,000 auction listings). How an increase in the number of reputable sellers, considering the combination of experience (number of auctions
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Figure 2. Distribution of log (number of positive feedback)
participated in) and percentage of positive ratings (customer satisfaction percentage), will impact auction outcomes remains an empirical question. competition in online auctions has been explored in various studies [5, 12, 59], which have focused on the effects of simultaneous listings of similar auction items on price premiums and bidding behavior. there is a research gap, however, on how a high concentration of reputable sellers affects auction outcomes and seller strategies. One potential outcome of having an increased number of reputable sellers in the auction marketplace is that buyers may become less influenced by feedback scores. this result should incentivize sellers to find new ways to differentiate themselves beyond reputation ratings. In this study, we find evidence that sellers increasingly rely on the use of discretionary auction attributes to successfully differentiate themselves in highly competitive environments, and the reputations of competing sellers in the marketplace significantly influences auction outcomes as well as the selection and effectiveness of seller differentiation strategies.
Role of Discretionary attributes: Visibility Enhancing and Quality Signaling

the consumer search and choice processes have been studied extensively in the marketing literature. Bettman et al. [9] provide an oft-cited framework of the constructive consumer choice process. the key insights from this framework are that consumers construct their preferences, and therefore their choices, on the spot and the context and framing of the choice environment affects the decision outcome. In other words, consumers adapt their decision-making strategies based on the situation
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and environment [46]. consumer judgments tend to be relative [1] and in an auction environment where all sellers have high positive feedback scores, these scores are not likely to help a consumer differentiate one seller from another. In such environments it may be possible for sellers to achieve differentiation by managing the set of auction listing characteristics. We refer to this set of auction characteristics as discretionary auction attributes. categorizing discretionary auction attributes requires an understanding of the underlying auction process. Online auctions follow a multistage buying process [2], which involves consumers making successive decisions that eventually lead to an auction outcome. a typical online auction process involves potential buyers viewing the auction followed by interested consumers placing bids and the eventual closing of the auction at a final price, where the winner is determined by the bids that were placed [53, 57]. In an online auction environment, numerous auctions with similar or identical products are often listed simultaneously. to garner more bids for an auction, sellers first need to attract potential buyers to view the auction, which depends on an auction listings ability to stand out among all other similar listings in the marketplace. Visibility of a listing is affected by a variety of factors that are under the sellers control. For example, Smith and Brynjolfsson [52] showed that listings at the top of online search results often get greater attention from shoppers. Hence, one natural category of discretionary auction attributes is visibility-enhancing attributes. consumer search precedes the choice process and the intensity of search can depend on the environment and choice task. Hubl and trifts [26] showed that the ways in which consumers search for product information and make purchase decisions are functions of the tools provided. In the online environment, the consumers search costs for both price and product information can be reduced; however, virtually infinite shelf space provides consumers with both the benefit of increased options and the cost of increased decision complexity [26]. Reducing search costs for price information generally leads to increased consumer price sensitivity, while reducing search costs for product quality information results in decreased price sensitivity [4, 36]. In the online environment the importance and impact of decision aids and information format increases [28]; therefore, increasing visibility of products and accessibility to product and price information likely reduces search costs and influences sales outcomes. the second category of discretionary auction attributes is quality signaling. Sellers are motivated not only to attract potential buyers to view their auction but also to entice bidding by signaling quality of the transaction. consumers are generally poor at assessing the value of goods and services, refine their valuation over time [50], and tend to adopt different forms of bidding strategies in online auctions based on their risk profile and perceived valuation of the product [7]. the sales environment, and cues a consumer draws from it, can have a significant influence on a consumers valuation of a product (for a review, see [2]). ariely and Simonson [2] suggest that consumers are affected by the setup of the auction and follow an iterative process in discovering their true valuation for the item in the auction. Research also suggests that the characteristics and context of the auction is known to affect the final price [50]. consumer preference is inherently constructive and purchas-
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ing decisions are highly sensitive to the local structure [9]. Hubl and leszczyc [24] have shown that the starting price of auctions affects a consumers value assessment of the product for sale. Moreover, the intensity of competition among bidders [25], the number of bids, and the identity of bidders [41] can also affect valuation. Dholakia and Simonson [17] showed that explicit comparisons to other products can induce more risk-averse and cautious choice in bidding behavior. Furthermore, Mithas et al. [40] suggest that Web site features such as content, layout, and functionality affect consumers loyalty, which is in line with prior research that has shown that perceived quality of online services are positively associated with consumers willingness to pay [35] and purchase intentions [20]. Behavioral theories propose that consumers are bounded rational and cognitively lazy, relying on firm-provided extrinsic cues (e.g., auction attributes) to aid their choice processes [33]. li et al. [34] apply cue diagnosticity theory [21] to explain how auction characteristics impact these cues and the resulting effects on bidding behavior. the purchasing decision environment can significantly influence consumer valuation of products and their willingness to pay, and effective quality signaling by sellers may be accomplished in auction markets by use of discretionary auction attributes. considering the increasing concentration of reputable sellers in online auction marketplaces and the reduced effectiveness of standard feedback measures [13, 16], it is likely that the discretionary auction attributes that increase visibility and signal quality will become increasingly important in determining auction outcomes. Prior research has not explored how the reputations of competing sellers in the market moderates the effects of these attributes on auction outcomes. We address this issue by first using unsupervised learning techniques to identify common seller strategies for the use of discretionary auction attributes. We then perform an econometric analysis to investigate how strategy selection and the effectiveness of discretionary attributes change based on the number of reputable sellers in the market.
Data and Initial analysis Field Data

tHe wii (pronounced we) is a video Game console produced by the Nintendo corporation. at the time of data collection, the Wii had a manufacturers suggested retail price (MSRP) of $249.99. It was first released in North america on November 19, 2006, and as of December 31, 2009, Nintendo had sold approximately 67.5 million Wiis worldwide.1 Nintendo was unable to keep up with the extremely high demand for the Wii during the initial two years of production [54]. Retailers, both brick-and-mortar and online, were unable to keep the console in stock until early 2009, and as a result, a secondary market developed through online auction sites, primarily eBay. as a result, many buyers resorted to paying significant price premiums at online auction sites to acquire the console. eBay holds a 90 percent share of the online auction market [51] and therefore hosted the majority of Wii auctions. Due to the high demand and scarcity in traditional retailers, the majority of Wiis auctioned on eBay during the sample
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period were brand new and unopened; at any given time hundreds of brand new Wii consoles were available for purchase on eBay. this provided an ideal context for collecting data on a very large set of auctions with completely homogeneous products available from, practically, only one online retail location, eBay. We collected data on every auction listed in the Video Games Systems Nintendo Wii category on eBay that ended during the 18-day period between January 18 and February 4, 2007. In total, data from 21,248 auction listings were collected. We filtered this data set in two ways. First, to ensure homogeneity of products, auctions of incorrectly categorized products (e.g., not a Wii, or Wii auctions with additional items) and auctions of used Wiis were removed from the sample. this reduced the data set to approximately 16,000 auctions. Second, auctions that were sold via the Buy It Now (BIN) option were removed. the BIN price (thus, the price premium) and discretionary auction characteristics are both set by the seller, and, therefore, determining effects of the auction attributes on the final price in BIN auctions would be highly endogenous. the resulting cross-sectional filtered data set contained 11,903 auctions, which comprised every new Nintendo Wii listed using the standard auction mechanism on eBay during the 18-day period. Of these 11,903 auctions, 9,807 were successfully sold. In our sample, we found that a large majority of sellers had high positive feedback percentages at or close to 100 percent, with less than 1 percent of them having positive feedback percentages lower than 96 percent (see Figure 1). this high concentration of sellers with high percentages of positive ratings confirms observations on the state of reputation in online auction marketplaces discussed in recent research (e.g., [13, 16]). However, the positive sales experience of the sellers in our sample, as measured by the number of positive feedback ratings received (a reasonable proxy for selling experience), varied substantially from novice sellers to sellers with close to 40,000 completed auctions with positive ratings. Figure 2 shows the distribution of the natural logarithm of the number of positive feedback ratings for sellers in our sample. Our analyses focus on the moderating effects of the reputations of competing sellers in the marketplace on the relationship between differentiation strategies and auction outcomes. as shown in Figure 1, our sample is already extremely concentrated with sellers that have high percentages of positive ratings; therefore we believe it makes more sense to use the count of positive feedback ratings as a primary reputation measure since it incorporates both experience and success and will also capture any real variability that exists due to feedback scores. However, we also control for the percentage of positive ratings received.
auction attributes and Data Variables

In most online auction marketplaces sellers can choose to utilize various discretionary attributes or features to enhance the appearance or modify the content of their auction listing. to operationalize the visibility-enhancing and quality-signaling constructs, we captured data on sellers use of all corresponding discretionary attributes and features.
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table 1 provides a detailed list of these attributes and their classification as visibility, quality, feedback, control, or instrumental variables. to attract buyers to view a particular auction, online auction marketplaces provide many features intended to enhance the visibility of an auction. On eBay, these enhancements include options such as making a listing featured, which places the auction at the top of search results within a page of auctions with similar ending times, giving an auction listing a bold title or highlighted border, or including photos of the item next to the listing in the search results. a full list of visibility-enhancing attributes captured in our data is provided in table 1. Sellers often choose to use these features, for a fee, in an attempt to make their auction listing stand out in the crowd. In markets with a high concentration of reputable sellers who are selling similar products, these visibility enhancements may significantly affect the likelihood of sale and the final price of an item. a consumer, at least partially, constructs his or her valuation of a product based on cues from the decision environment. Sellers can potentially use certain auction features to signal quality and trustworthiness to potential buyers and thus extend reputation effects beyond basic feedback scores. Examples include the use of additional photos on the auction page to provide more detail of the product being sold, making buyer protection available, becoming a verified seller, having a storefront, providing gift wrapping options, and displaying responses to buyer inquiries publicly (a full list is provided in table 1). In our analysis, we also controlled for several other factors, such as the effects of the starting price [24], shipping cost, end time, and the use of a reserve price, which have also been commonly employed in earlier studies [6, 30]. although our sample uses data captured within a relatively short time period, we also controlled for possible difference in buyers behavior in the 18-day period by using individual day dummy variables.
Preliminary cluster analysis

Selling strategies are known to impact auction outcomes [47, 49]. We identified common differentiation strategies of sellers in our data set based on their adoption of quality-signaling and visibility-enhancing attributes. Our approach is not unlike that of Bapna et al. [8], in which they use cluster analysis to identify a taxonomy of bidder strategies for participants in online auctions. Our goal in this analysis was to discover common seller strategies without imposing any a priori model assumptions; therefore, we used a clustering-based unsupervised learning technique. Our results provide a baseline for understanding how sellers utilize discretionary auction attributes. to preprocess our data and establish a common scale for clustering, we created a set of composite indices to rate the sellers in our sample according to their use of discretionary attributes in the visibility and quality dimensions. attributes with binary values were left as 0 or 1 and attributes along other numeric variables were scaled to the 01 range. For each attribute type, we summed the values of all the attributes for
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table 1. Description of Variables in Main Research Model

Description Attribute type Dependent variable Dependent variable Dependent variable Visibility Visibility Visibility Visibility Visibility Visibility Feedback Feedback Quality Quality
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Variable
Price premium Bid count View count Featured
Highlight
Border
Bold title
Gallery display
Listing duration Log feedback score Feedback percent Storefront About me
The final price of the auction minus the MSRP of the product. The total number of bids an auction received. The number of views an auction received. The auction is listed as a featured auction where it will be showcased at the top of search results and listings. Binary: 1 for yes, 0 for no. A visual enhancement: the auction listing has a background color in search and category listings. Binary: 1 for yes, 0 for no. A visual enhancement: the auction listing has a border drawn around it in search and category listings. Binary: 1 for yes, 0 for no. A visual enhancement: the auction listing has a bold title in search and category listings. Binary: 1 for yes, 0 for no. A thumbnail photo is displayed for the auction in search and category listings. Binary: 1 for yes, 0 for no. The length of time the auction is listed: spans from 1 to 10 days. Natural log of the positive feedback score. The percentage of positive feedback over total feedback. The auction is hosted by an eBay store owner. Binary: 1 for yes, 0 for no. The seller has an about me page. Binary: 1 for yes, 0 for no.
Buyer protection
Quality Quality
Public message
Photo display Gift icon Starting price Has reserve Shipping costs End time Daily dummies Buyer prerequisites Shipping service options Starting time
eBay buyer insurance program where buyers can seek recourse for unfulfilled or fraudulent transactions. Binary: 1 for yes, 0 for no. The auction page has public message posted (often to answer buyers queries; responsiveness of the seller). Binary: 1 for yes, 0 for no. Photos are provided on the detail auction page. Binary: 1 for yes, 0 for no. The item can be gift wrapped. Binary: 1 for yes, 0 for no. Beginning price of the auction. The auction has a reserve price. Binary: 1 for yes, 0 for no. Freight and handling charges to be incurred by the buyer. The time the auction will conclude. 1 coded for 8 a.m. to 10 p.m. (central time), 0 otherwise. Individual dummy variables to represent each day when an auction ends. Buyers need to satisfy preset criteria before they can bid. Number of shipping options the seller offers.
Starting time of the auction. 1 coded for 8 a.m. to 10 p.m. (central time), 0 otherwise.
Cross promotion
Secondary category
The auction is listed as a cross-promotion. Cross-promotion items will be listed in search outcomes when users search for related products. Binary: 1 for yes, 0 for no. The item is listed as a secondary listing. Binary: 1 for yes, 0 for no.
Quality Quality Control variable Control variable Control variable Control variable Control variable Control variable Instrumental variable (bid count) Instrumental variable (bid count) Instrumental variable (view count) Instrumental variable (view count)
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each auction to create a composite score and then normalized each composite score to a 01 range to create the indices [32]. a third index was also created to rate sellers based on their feedback scores (i.e., percentage positive feedback and number of positive feedback ratings). Since this was an exploratory analysis meant to discover patterns, we did not add weights to any attributes. the indices therefore represent the extent to which discretionary attributes were employed; sellers with higher index values employed more attributes in that particular dimension than those with lower index values. We used the k-means clustering method to cluster all 11,903 auctions into k clusters based on similarity using a Euclidean distance measure. We chose the k-means technique because of its efficiency and effectiveness; k-means typically provides tighter clusters than other methods and does not allow for cluster overlap. By iterating toward the optimal solution, k-means is less affected by outlier elements since they are corrected for in subsequent clustering passes [18]. to perform the analysis, we created a series of 14 k-sized clustering solutions for k = 2, . . . , 15. the clustering solution with the optimal number of clusters was determined by minimizing the mean squared error between successive clustering solutions, which indicates convergence of the solution [10, 18, 56]. We also tested the conformity of the cluster results by running the same data using the expectations maximization algorithm as an alternative clustering approach. the optimal clustering solution contained six clusters, k = 6. table 2 provides a summary of our clustering results. Six mutually exclusive clusters of the 11,903 auctions were identified and uniquely characterized by the sellers feedback scores and their use of visibility and quality attributes. the first cluster, which we characterized by a visibility investor, contained auctions that utilized an above average number of visibility attributes, with slightly above average feedback scores and quality attributes. auctions in this cluster had the highest probability of sale (85.71 percent) and had the highest average price premium ($85.19 for successfully sold auctions). comparing the first cluster with other clusters that were characterized by above average user feedback, it initially appears that investment in visibility attributes has the largest impact on auction success. cluster 4, the reputation rider, is characterized by auctions with below average use of visibility attributes, but with slightly above average use of quality attributes and above average feedback scores. this cluster had a slightly smaller chance of successful sale (83.39 percent) and a significantly lower average price premium ($79.03). Similarly, the feedback rider (cluster 3) underperforms with a sales probability of 80.11 percent and an average price premium of $78.61. these comparisons suggest that a seller cannot rely on feedback scores alone to be successful. auctions in cluster 5, reputation investors, had higher than average feedback scores and utilized slightly more visibility attributes than average and significantly more quality attributes. these sellers were similar to visibility investors by being above average across the board, but focused more on quality attributes than visibility. Reputation investors had a sales probability of 83.96 percent and an average price premium of $82.93. Interestingly, sellers with below average use of both visibility and quality attributes and below average feedback scores, derelict sellers (cluster 2), performed at about
table 2. K-Means clustering Results
Full data
cluster 1 Visibility investor
cluster 2 Derelict seller
cluster 3 Feedback rider
cluster 4 Reputation rider
cluster 5 Reputation investor
cluster 6 compensator
Cluster size (percent of total) Visibility index
Quality index
Feedback index
11,903 (100) 0.1958 (0.1164) 0.2317 (0.2029) 0.5533 (0.2403)
721 (6) 0.4155 (+) (0.1187) 0.2434 (+) (0.0979) 0.7652 (+) (0.0795)
3,932 (33) 0.1861 () (0.1107) 0.1790 () (0.1127) 0.2738 () (0.0691)
2,479 (21) 0.1765 () (0.0913) 0.0000 () (0.0000) 0.7034 (+) (0.0387)
2,653 (22) 0.1588 () (0.0633) 0.2500 (+) (0.0000) 0.7751 (+) (0.0527)
979 (8) 0.211 (+) (0.1068) 0.5710 (+) (0.1441) 0.7969 (+) (0.046)
1,139 (10) 0.2053 (+) (0.1304) 0.5766 (+) (0.1322) 0.3197 () (0.0626)
82.68 $81.42
Percent sold Average price premium (sold) Average price premium (all)
$67.32
85.71 (+) $85.19 (+) $73.02 (+)
82.27 () $82.19 (+) $68.21 (+)
80.11 () $78.61 () $62.97 ()
83.39 (+) $79.03 () $66.34 ()
83.96 (+) $82.93 (+) $69.63 (+)
83.67 (+) $84.21 (+) $70.46 (+)
Note: + and indicate values above and below the sample average, respectively.
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the average with an 82.27 percent chance of sale and an average price premium of $82.19. this was by far the largest cluster in the data set. although the derelict sellers were below average on visibility, they still employed more visibility attributes than the feedback and reputation riders (clusters 3 and 4, respectively), which may explain the higher price premiums despite lower feedback scores, and further suggest the importance of visibility factors. Finally, the auctions in cluster 6, compensators, were characterized by the slightly above average use of visibility attributes and significantly above average use of quality attributes, but significantly below average reputation scores. compensators actually enjoyed the second-largest average price premium, $84.21, and an above average probability of sale. this initial cluster analysis presents preliminary evidence of strategy differentiation and raises some interesting issues on the use and importance of discretionary attributes in online auctions. We explore these issues further with in-depth econometric analyses. First, we estimate the impact of each discretionary attribute on listing views, bids, and the average price premium earned across the entire data set. Second, we analyze how the effectiveness of visibility and quality attributes changes in auction environments with varying reputations of competing sellers. Finally, we examine how the presence of more or less experienced reputable sellers in the marketplace affects the selection of selling strategies. together, these analyses provide a comprehensive view of how sellers in highly competitive markets choose to differentiate themselves, and how well their strategies pay off.
Econometric analysis and Results

Here we present a Baseline empirical characteristics on price premiums:
model
that measures the effects of auction (1a)
P = gX + e.
We propose that the price premium of an auction, P, is a function of a set of auction characteristics represented by vector X. Specifically, X is operationalized as a vector of the auction attributes, which include all of the independent and control variables in table 1 (table 1 has attribute descriptions and classifications). e represents stochasticity in this relationship and g is the vector of parameters in Equation (1a). In general, an online auction involves potential buyers viewing the auction, then bidding, and the eventual closing of the auction and winner determination. therefore, we are equally interested in finding out if the same variables in X are associated with increases in number of listing views and bids as shown below. log(view count) = gH Xp + e log(bid count) = gB1 Xp + gB2 log(view count) + e. (1b) (1c)
Xp contains all the variables found in X except for bid count. Equation (1b) is estimated using feasible generalized least squares (FGlS). We explain the estimation of Equations (1a) and (1c) next.
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Issue of Endogeneity and Self-Selection: Heckman-IV Selection Model

the risk of endogeneity is present in all econometric models [58], and we appropriately controlled our empirical model for potential endogeneity biases. We first inspected variables in vector X for the possibility of endogeneity and found that one of the variables, bid count, is highly correlated with price premium and is likely to be correlated with most factors that generally impact the eventual price premiums. For reasons of parsimony and pragmatism, it is not feasible to include an exhaustive, global list of all the possible factors in the theoretical vector X, and the possibility of omitted variable bias is inherent in most (if not all) empirical models. to mitigate the potential problem of endogeneity, we therefore use instrumental variable (IV) regression analysis and rewrite Equation (1a) as (2): P = g1 Xp + g2 B + e, (2)
where B represents the number of bids an auction received and g1 and g2 are parameters for the equation. Briefly, the additional instrumental variables used for bid count are shipping service option and starting time.2 Notably, this equation estimates the indirect effect of view count on price premium via the number of bids received. Our data consist of approximately 12,000 auction listings over an 18-day period; however, only auctions that resulted in a sale can be used to compute price premiums. the absence of the dependent variable, price premium, in unsuccessful auctions causes a natural omission of these observations. It is possible that these auctions have characteristics that make them unappealing to buyers and are, hence, self-selected out of the population. this natural self-selection that occurs in the data requires a more appropriate analysis to control for any potential self-selection bias [27].3 to the best of our knowledge, such an analysis has not been performed in previous auction research that examines price premiums or closing price. We utilize the Heckman selection model to estimate Equation (2) as follows. For every observation, i, we specify a latent variable, zi* for the selection equation in a probit model: zi* = p1i wi + v1i , (3)
where price premium, Pi , is observed when zi* > 0. v1i represents the error term, wi represents the factors that impact sales probability of an auction, and p1i represents parameters. We rewrite the unobservable zi* as zi : zi = 1(zi* > 0). (4)
zi is observable and represents a binary indicator of whether the auction is sold (zi = 1 if sold, zi = 0 if unsold). auctions that were not successfully sold did not have a price premium since there was no corresponding final sales price. Equations (3) and (4) jointly estimate the probability of a successful auction sale. Following Heckman [27], we show that the price premium conditional on sale can be estimated by
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Pi zi* > 0 = 1 X pi + 2 Bi + i ( u ) + ui ,
(5)
where ui represents error term; represents parameters; and (u) represents the inverse Mills ratio, which is commonly used to partial out the effects of sample selection bias. Given the presence of endogeneity, Equation (5) is estimated by using the Heckman-IV methodology. For comparison purposes, we also estimated the regular IV regression (represented by Equation (2)), which does not take into consideration the self-selection bias. Finally, for Equation (1c), view count is likely to be endogenous given that factors that affect view count are likely to affect bid counts simultaneously. For similar reasons explained for the estimation of Equation (1a), we also used IV regression to estimate Equation (1c). the additional instruments used are secondary listing and cross-promotion. all the results are presented in the Regression Results: Effects on Views, Bids, and Price Premiums section.
Modeling auctions under Different competitive Reputation Environments

the general Heckman-IV model described above provides a baseline for understanding the effects of auction characteristics on price premiums in our sample. It analyzes the entire population of auctions without distinguishing the effects of the reputations of other sellers in the marketplace on auction outcomes and the use of discretionary auction attributes. the primary goal of this research, however, is to understand how the presence of reputable sellers in the marketplace influences the effectiveness of discretionary auction attributes and, in turn, the selection of selling strategies. to study these potential moderating effects, we have to measure the level of reputation among adjacent sellers within the auction environment. all the listings of Nintendo Wii consoles were, by default, listed in ascending order according to their auction ending time on eBay. Hence, the likelihood of a consumer to observe an auction listed alongside another is strongly correlated to their proximities in auction ending times. to develop a metric that provides a measure of the level of reputation among sellers in adjacent listings, we first sorted the entire population of Wii listings according to their auction end times and then for each auction (hereafter, the referent auction) we defined a window of the 50 auctions with the closest end times (i.e., 25 with end times prior and 25 with end times after the referent auction). these 50 adjacent auctions represent the auctions that are most likely to be presented alongside a referent auction. We selected a window of 50 auctions because the default number of auctions listed on any eBay results page is 50; however, we also tested other window sizes (e.g., 25, 100, 150) and observed similar results. as shown in Figures 1 and 2, our sample contained an extremely high concentration of sellers with high percentages of positive ratings; however, the distribution of the absolute number of positive feedback ratings received by sellers contained a fair amount of variability. the number of positive feedback ratings can be considered a
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proxy for positive seller experience, since a seller must hold an auction to receive a positive feedback score. Given the severe skew of the percent positive feedback ratings, we chose to use the count of positive ratings as our main indicator of a sellers reputation, since it captures both a measure of experience and a measure of customer satisfaction. We computed our metric by adapting the work of chan et al. [12] and Zeithammer [59], in effect calculating a weighted sum of feedback scores of the competing sellers in adjacent listings. For each adjacent auction in the 50-auction window, we measured the reputation of the seller using the natural logarithm of total number of positive ratings.4 to better represent the impact of positive seller experience on the adjacent listings, we weighted each listings reputation measure by the number of positions the listing is likely to be away from the referent auction.5 the total measure of marketplace reputation for a referent auction is then the sum of the weighted reputation measures of the 50 adjacent sellers, C shown in Equation (6): C=
26 j * ln ( positive feedback score ) j =1 25

25
26 k + * ln ( positive feedback score ) . k =1 25

25
(6)
the variable j refers to the position of adjacent auctions with end times earlier than the referent auction and k refers to the position of adjacent auctions with end times later than the referent auction. For example, the closest adjacent auctions with end times before and after the referent auction are referenced by j = 1 and k = 1, respectively. Notably, the weighting variable follows a declining linear function, whereby the effects of the competitiveness of adjacent listings decline as we move further away from the referent auction. the weighting variable is important for the following reasons. First, the weight represents the possibility of an auction to be shown alongside the referent auction. the further an auction is away from the referent auction in terms of end time, the less likely it will appear next to the referent auction in the eBay auction listings. Second, the closer an auction is listed to the referent auction, the more likely it will draw the attention of the buyer, and prior research has shown that the position of listings affects online purchases due to limitations in consumers attention [11, 52]. consumers are more likely pay attention to, and thus are influenced by, listings nearest to the referent auction. C captures the extent to which competing reputable sellers are present in the listings surrounding a referent auction listing. the goal of our analysis is to understand whether the presence of more or less reputable sellers significantly moderates the relationships between auction attributes and auction outcomes. testing the moderating effects in empirical models with multiple categorical independent variables and a continuous moderating variable is not trivial. the traditional practice of including interaction terms is often erroneously applied in such situations (see review in [29]). Our present model contains multiple categorical variables, and thus to test the moderating effects of the competitive environment we adopt the methodology prescribed by kenny et al. [31] and Miles and Shevlin [39]. the methodology suggests that the moderating
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effects can be tested by observing differences in the main effects of the independent variables at various levels of the marketplace reputation metric. Specifically, the population of auctions is split into three subsamples: one with auctions that had C values at least 1 standard deviation below the mean of C, one with auctions that had C values at least 1 standard deviation above the mean, and the third with auctions that had C values between the boundary values of the other two subsamples. Estimating the model under different values of C allows us to empirically observe whether the competitiveness of the selling environment moderates the effects of auction characteristics on price premiums. another common way of splitting the data is to perform a median split of the data into two samples, in this case based on the marketplace reputation metric, C. We performed our analysis using both the threesample and two-sample splitting criteria, and both yielded empirically similar results. For conciseness, we report only the more detailed three-sample analysis (high, average, and low values of C). to formally test the differences in coefficients among different samples, we modify the Heckman-IV regression described previously to jointly estimate the regressions for all three samples using seemingly unrelated regression (SuR). this joint estimation allows us to perform a Wald test to determine whether the coefficients across equations are statistically different, signifying the existence of moderating effects.
Regression Results: Effects on Views, Bids, and Price Premiums

For all the regression analyses, we computed the variance inflation factor (VIF) and observed that multicollinearity was not a significant issue; the maximum observed VIF for all the regressions was significantly less than the standard cutoff level of 5. the results for the regressions are shown in tables 3 and 4. In general, the results show that successful differentiation along the dimensions of visibility-enhancing and quality-signaling attributes was associated with increased views and bids as well as higher price premiums. In addition, we found strong evidence of a moderating effect due to the reputations of competing sellers in the marketplace. listing Views and Bids Our first analysis involved standard FGlS and IV regressions to estimate the effects of discretionary visibility-enhancing and quality-signaling auction attributes on the number of views and bids an auction listing receives. We expected to see these attributes play a significant role in attracting customers to auctions and enticing them to participate in the bidding process. the first two main columns of table 3 present the results of these regressions. We found that for most of the visibility-enhancing attributes their use is correlated with increased listing views. Significant positive effects on the number of views were observed for listings that were featured, used borders, used bold titles, used longer listing durations, or incorporated a photo of the product in the search listing results. Interestingly, two quality-signaling attributes were also significantly correlated with
table 3. Results for Regressions on Views, Bids, and Price Premiums (Overall Population) FGlS log bids coefficient
3.611 0.023 0.001 0.028 0.066 0.064 0.043 0.024 0.005 0.037 0.032 0.001 0.016 0.002** 0.266*** 0.064 0.053 0.097** 0.044** 0.043*** 0.088** 0.076*** 1.477 0.627*** 6.278** 23.759*** 5.281* 2.583 1.223 1.290** 0.503 1.568 0.001 0.023 0.001 0.025 0.358 0.077 0.038 0.021 0.010 0.035 0.026 2.215 1.107 0.092 3.136 3.946 2.882 2.537 1.07 0.592 1.611 2.06
Estimator Price premium coefficient Standard error
IV regression
IV regression
Heckman-IV Price premium coefficient

4.434* 1.516 0.611*** 1.757 24.572*** 5.180* 3.117 1.161 1.090* 1.792 2.014
Dependent variable Standard error Standard error
log views
Independent variable
coefficient
Standard error
2.624 1.195 0.103 2.308 4.023 3.058 2.834 1.148 0.568 1.856 2.312 (continues)
Bid counta View counta Buyer protection Shipping cost Has reserve Featured Highlight Border Bold title Listing duration Storefront Photo display
0.079*** 0.002* 0.027 1.208*** 0.012 0.120*** 0.069*** 0.026*** 0.198*** 0.040
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table 3. continued FGlS log bids coefficient

0.078** 0.079*** 0.003 0.006*** 0.130** 0.206 0.002 0.040 0.001 0.230*** 0.159*** 3.489*** 0.60
a
Estimator Price premium coefficient

3.935 2.195*** 0.112 0.215* 5.863*** 51.399*** 11.818*** 0.005 0.198*** 9.131*** 1.257 38.395 0.08 65.969 2.421 0.577 0.193 0.126 2.091 3.820 8.592 1.302 0.069 1.873 2.784
IV regression
IV regression
Heckman-IV Price premium coefficient Standard error
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Dependent variable Standard error

0.021 0.007 0.004 5.66E-5 0.030 0.095 0.109 0.030 0.002 0.035 0.021 0.389 0.23 0.569 0.034 0.007 0.004 3.28E-4 0.053 0.071 0.109 0.032 0.002 0.029 0.019
log views Standard error Standard error
Independent variable
coefficient
0.233*** 0.029*** 0.014*** 0.003*** 0.373*** 0.307 0.174 0.026 0.001 0.165*** 0.034
Gallery display Log feedback score Feedback percent Starting price Public message Daily dummies (min) Daily dummies (max) About me Gift icon End time Buyer prerequisites Inverse Mills ratio Constant R2
6.007***
4.099 2.506*** 0.163 0.242* 7.225*** 50.229*** 10.945*** 0.484 0.174** 8.580*** 0.706 20.371*** 10.792 0.17
2.516 0.706 0.213 0.142 2.010 4.126 9.550 1.438 0.074 1.861 3.124 7.902 78.969
Notes: Results of the regular IV regressions on price premiums are presented for comparison purposes. Instrumented. * p < 0.10; ** p < 0.05; *** p < 0.01.
table 4. Effects of Market concentration of Reputable Sellers on Price Premium (Heckman-adjusted Seemingly unrelated Regression) low marketplace feedback concentration coefficient
1.294*** 1.460 0.780*** 1.460 17.112*** 1.901 1.784 3.556* 0.174 0.107 0.214 8.465*** 1.459** 0.391 0.079*** 9.344*** 43.086*** 19.147*** 0.478 0.342*** 4.848*** 5.131*** 9.126* 50.012 0.30 0.24 0.103 1.796 0.061 2.905 5.705 4.282 3.293 1.865 0.355 2.837 2.512 1.759 0.588 0.338 0.009 3.142 6.184 7.411 2.379 0.132 1.830 1.835 4.717 34.426 1.046*** 0.926 0.616*** 2.354 30.041*** 0.627 0.691 0.130 0.236 2.359 0.626 6.594*** 1.644*** 0.004 0.070*** 7.144*** 52.501*** 3.335*** 0.614 0.172* 10.471*** 4.211*** 0.343 108.091*** 0.071 1.276 0.043 2.234 3.599 3.310 2.395 1.321 0.264 2.192 1.742 1.243 0.424 0.248 0.006 2.192 5.919 6.331 1.706 0.088 1.876 1.286 3.206 25.253 0.978*** 0.283 0.978*** 0.408 31.625*** 8.633 0.040 1.728 0.552 7.113** 0.902 2.953 1.127 0.412 0.056*** 9.847*** 74.846*** 26.158*** 4.432* 0.009 5.547* 4.754** 8.945 98.466*** 0.34
average marketplace feedback concentration coefficient Standard error coefficient Standard error
0.125 2.113 0.083 3.726 5.415 5.864 4.007 2.098 0.445 3.309 2.988 1.992 0.702 0.343 0.011 3.627 6.705 8.241 2.680 0.152 3.126 2.016 5.621 34.766
High marketplace feedback concentration
Price Premium as dependent variable
Standard error
Bid count Buyer protection Shipping cost Has reserve Featured Highlight Border Bold title Listing duration Storefront Photo display Gallery display Log feedback score Feedback percent Starting price Public message Daily dummies (min) Daily dummies (max) About me Gift icon End time Buyer prerequisites Inverse Mills ratio Constant R2 * p < 0.10; ** p < 0.05; *** p < 0.01.
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increased listing views. Sellers that used the storefront feature of eBay and publicly posted responses to customer inquiries also saw significant increases in auction listing views. these views are likely by returning customers who were first attracted to the listing through visibility-enhancing features and then returned because of qualitysignaling attributes. We also observed that both percentage of positive ratings and the number of positive ratings of the seller led to a higher number of views. We found similar effects of visibility-enhancing and quality-signaling attributes on the number of bids an auction receives. However, a few noticeable differences were observed. First, higher shipping costs and auctions with reserve prices received fewer bids, as expected, since there is higher associated costs and a minimum price requirement. Second, the use of a photo display in the auction listing, one or more detailed images of the product, was correlated with a significant increase in the number of bids. Interestingly, the percentage of positive ratings received by a seller was not significantly correlated with the number of bids a listing receives, suggesting that this attribute does not influence a potential buyers decision to participate in an auction. Price Premiums to explore the effects of discretionary attributes on price premiums, we performed the Heckman-IV regressions discussed in the previous section. We should note that since we control for number of bids an auction receives in these regressions the effects of the discretionary attributes on price premiums observed are those that are above and beyond their effects on the number of bids. Since bid count was significantly and positively correlated with price premiums (see table 3), the discretionary attributes discussed above impact price premiums indirectly through bid count. Higher visibility from being a featured item (coefficient: 24.752, p < 0.01) had the greatest direct effect on price premium.6 Our results suggested that, all else being equal, being featured helped the auction closing price to increase, on average, $24.75.7 Being featured likely attracts potential buyers with a higher willingness to pay who are reluctant to engage in involved search due to higher opportunity costs. another significant visibility-enhancing attribute that differentiated the auction was a longer listing duration (coefficient: 1.090, p < 0.1). longer listing duration increased the exposure time and likely improved the chance of attracting a buyer with a higher willingness to pay for the product. For each additional listing day, the price premium increased by $1.09. In addition, we found that highlighting the listing had a positive effect on price premium (coefficient: $5.18, p < 0.10). listings with longer duration and fewer views would naturally receive fewer bids. there are two possible explanations for this observed result. First, we are controlling for the number of views in our model, which means the effects of listing duration must be considered holding the number of views an auction receives constant. therefore, listings with longer duration and fewer views may just be unattractive to bidders. Second, it has been shown in prior research that bidding tends to be concentrated toward the end of auctions [41]. therefore, auctions with longer listing durations may be putting themselves at a disadvantage since bidders prefer to bid on auctions that are ending soon.
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We observed that the use of quality attributes is also positively associated with price premiums. auctions that have public messages on average close with higher price premiums (coefficient: $7.225, p < 0.01). this suggested that responsiveness toward buyer queries, indicated by posting messages publicly, is beneficial for the seller. the relationship between the feedback score of a seller and the price of the auction was positive and significant (coefficient = $2.506, p < 0.01). the feedback score was measured by the natural logarithm of the total number of positive ratings the seller has received. this finding is similar to those in other studies, which show that the number of positive ratings (as a proxy for reputation) is known to have a positive effect on price premium (e.g., [30]). although the number of positive ratings was significantly associated with higher price premiums, the percentage of positive feedback (percentage score) did not have a significant effect on the price premium. this finding supports prior research claims [13, 16] that the high concentrations of sellers with high positive percentages may be reducing the usefulness of this information in seller differentiation. It is likely that the percentage of positive feedback has become a necessary but not sufficient condition for being successful in highly competitive environments. the significant inverse Millss ratio (p < 0.01) of the Heckman-IV regression suggested the presence of self-selection bias, which shows the use of the Heckman technique was warranted [27]. By using Heckman-IV, the conclusions drawn are now conditional upon the outcome of the auction, where we effectively consider all auctions, including those that were not sold. Further, we also observed differences in the estimates between the Heckman-IV and the standard IV regression. Specifically, we observed that the estimates of variables, which affect both price premium and probability of sale, are likely to be different under both estimation techniques. For example, under the Heckman-IV model, having a reserve price did not have a significant effect on the price premium, but under the standard IV regression, where we did not account for the decrease in probability of sale, the impact on price premium was estimated to be $6.278. this likely occurs because having a reserve price decreases the probability of sale but enhances the closing price levels. Other differences can be observed in the magnitude of the coefficient estimates between the Heckman and standard IV regressions in table 3. these results suggest that by not accounting for self-selection sample biases, one might incorrectly conclude that some attributes have larger or smaller impact on price premium. Effects of the Reputations of competing Sellers We observed strong empirical support for the existence of moderating effects of reputations of competing sellers in the marketplace. Results of the Heckman SuR regressions performed on the high, average, and low C metric subsamples are presented in table 4. In general, we observed that the impact of discretionary attributes on price premiums increased as values of the C metric increased. Since the Heckman-IV regression equation for each sample was jointly estimated using SuR, we conducted Wald tests
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table 5. testing of coefficients across Groups with Different Marketplace Feedback concentration (Wald test) Groups
Low versus average (average > low) Average versus high (high > average) Low versus high (high > low)
2 value (Wald test)

57.40 91.42 127.31
p-value
0.0289 < 0.0001 < 0.0001
to examine if the coefficients are simultaneously different across equations. Results of the Wald tests (table 5) showed that the coefficients of the high marketplace reputation sample were jointly greater than those of the average marketplace reputation sample. likewise, the coefficients of the average reputation sample were jointly greater than those of the low reputation sample. this finding strongly suggests that the reputations of competing sellers within the auction market significantly moderated the effect of discretionary auction attributes on auction price premiums. For all three samples, being featured remained the top discretionary attribute that affected price premiums, and it becomes substantially more important as the market becomes more concentrated with experienced reputable sellers (coefficients increased from $17.112 to $30.041 and finally to $31.625). another interesting observation was that although the number of positive ratings is positively associated with price premiums, we found that when the weighted sum of the reputations of adjacent sellers was higher than average, positive feedback ratings became no longer associated with an increase in price premiums for the referent auction. Further, we observed that the percentage of positive ratings was not significant in any of the three subsamples. all else being equal, when a referent auction is surrounded by sellers with high numbers of positive ratings, the number of positive ratings of the referent auction seller becomes less important in determining the price premium. Furthermore, this suggests that there may be some threshold above which additional positive sales experience does not impress buyers.
Market characteristics and the Selection of Selling Strategies

We have established that certain discretionary attributes have greater effects than conventional reputation measures on price premiums when the market is concentrated with experienced reputable sellers. Now we examine how the reputations of competing sellers and other market characteristics impact a sellers choice of differentiation strategy. Specifically, we analyze how the weighted sum of the reputations and use of discretionary attributes of sellers in the marketplace at the time of listing creation affect a referent sellers choice of discretionary auction attributes. We computed a metric for the weighted sum of reputations in the selling environment at the time of listing (see Equation (7a)) similar to the C metric described previously. the only difference from the earlier measure is that we defined the adjacent auctions
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to be the list of 50 auctions8 with ending times prior to and closest to the starting time of the referent auction (as compared to ending time in our previous metric). these 50 auctions represent the listings most likely to be presented on the main page of eBays search results at the point when the seller of the referent auction is finalizing his or her choice of auction attributes and differentiation strategy in the creation of the listing. this metric, Cr , measures the weighted average of the feedback scores of the sellers already in the market just prior to the listing of the referent auction. Cr = Cv = Cq =
50
51 j * ln ( feedback ) j =1 50
50
(7a) (7b) (7c)
51 j * visibility_index j =1 50
51 j * quality_index. j =1 50
50
to appropriately measure the use of visibility and quality attributes in the selling environment, we focus on the same 50 auction listings described in the preceding paragraph. We use the visibility and quality indices (as described in the cluster analysis) to measure the level of use of visibility and quality attributes for each of these 50 listings. For each metric, we sum the corresponding index values of the 50 listings (shown in Equations (7b) and (7c)). two metrics are computed: the first measures the level of visibility attributes used in the selling environment (Cv ) and the other measures the level of quality attributes use in the selling environment (Cq ). In our cluster analysis, described previously, a sellers strategy is measured by three indices (visibility, quality, and feedback). Specifically, the seller cannot manipulate the feedback index when an auction listing is created, since it is based on ratings previously posted by other auction participants. Our earlier clustering results suggest that sellers with high and low levels of feedback indices proceed with different selling strategies. therefore, in our analysis we divide the population into two groups: one with sellers of below average feedback index and another with sellers of above average feedback index. to examine how market characteristics affect strategy choice through the use of discretionary auction attributes, we propose that a sellers selection of visibility-enhancing and quality-signaling attributes, as measured by the visibility index (Iv) and the quality index (Iq), for a listing are functions of the reputations of competing sellers in the marketplace at the time of listing creation, measured by Cr , the use of similar attributes by competitors, as measured by Cv and Cq , and a list of control variables, Xc . Iv = f (Cr, Cv, Xc) Iq = f (Cr, Cq, Xc). (8a) (8b)
In these models, we control for various factors such as age, number of past transactions, and time. We measure age as the total number of years the seller has been operating on eBay. the number of past transactions measures the accumulated experience
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the seller has in online auctions. as discussed earlier, we also control for the potential differences in temporal market behavior with daily dummy variables. Finally, the number of past transactions measures the total number of times the seller has transacted over eBay and it proxies the sellers auction experience within eBay. We have omitted all of the variables that make up the referent sellers dimensions of strategic choices (visibility index, quality index, and feedback index). Variables such as positive reputation percentage and gallery photo are used as values to calculate the indices and hence should not be reused as independent variables in Equations (8a) and (8b). We employed tobit regressions to estimate Equations (8a) and (8b) because the dependent variables of both equations are indices computed by the sum of various categorical variables, hence naturally bounded within a range [58]. From our analysis (table 6), we found that different factors are associated with the sellers choice of visibility and quality attributes. Broadly, we observed that the use of quality attributes in auction listings is associated with the characteristics of the referent seller and the use of visibility attributes is associated with characteristics of other sellers and listings that are simultaneously presented in the marketplace. With respect to quality attributes, we observed that sellers are more likely to use them in their listings when they are more experienced, that is, the referent seller has completed more transactions in the marketplace. this finding is consistent for both sellers with low and high reputation and the results show a positive and significant association between the number of past transactions and the quality index. this is plausible as sellers with more experience through multiple transactions are more likely to use quality-signaling attributes if experience has shown these attributes to be effective differentiators. Furthermore, some of the quality attributes potentially have a lasting effect for future auctions (e.g., storefront, about me page). For high-reputation sellers, we observed that the number of years on eBay is negatively associated with the likelihood of using quality indicators (coefficient = 0.004, p < 0.01) while controlling for the number of previous transactions. this may suggest potential complacency in high-reputation sellers who have been using eBay for a long time and no longer feel it is necessary to employ quality attributes for differentiation. the use of visibility attributes appears to be influenced most by the characteristics of the marketplace. We observed some difference between low- and high-reputation sellers and their adoption of visibility-enhancing attributes. For low-reputation sellers, the association between the visibility index (dependent variable) and visibility of other concurrent listings in the marketplace are positive and significant. this suggests that low-reputation sellers are more likely to use visibility-enhancing attributes in the presence of other auctions that adopt visibility-enhancing attributes. For high-reputation sellers, we observed that reputations of the sellers in other simultaneous listings are associated with an increased use of visibility-enhancing attributes in the referent auction listing. Sellers might feel that in the presence of other high-reputation sellers, one way of differentiating is to enhance the visibility of their listing. upon further reflection, the difference in strategy choice for visibility-enhancing and quality-signaling attributes is intuitive. Quality signaling is primarily driven by the properties pertaining to the listing, product, and transaction, thus, motivations to
table 6. Strategy choice among Sellers (tobit Estimation) low reputation sellers Visibility index Standard error coefficient
0.001 0.043*** 0.019 0.095 0.01 0.002 0.005 0.034 0.055 0.001 0.001 0.003 0.003 0.038* 0.01*** 0.001 0.125***
High reputation sellers Visibility index coefficient Standard error

0.001 0.002 0.013 0.023 0.000 0.000 0.042
Dependent variables Standard error
Quality index
Quality index coefficient

0.004*** 0.026*** 0.037 0.014 0.002
coefficient
0.001 0.002 0.014 0.023 0.000 0.000 0.037 0.003 0.327*** 0.002 0.080
Standard error
0.001 0.002 0.012 0.021 0.000 0.001 0.092*** 0.001 0.035
Age of sellers (years) 0.001 Number of past transactions 0.000 Daily dummies (min) 0.022 Daily dummies (max) 0.019 Reputation of other sellers 0.001 Visibility of other listings 0.01*** Quality of other listings Constant 0.149*** * p < 0.10; ** p < 0.05; *** p < 0.01.
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use quality attributes are likely to be made with regard to the individual traits of the seller or listing. Visibility of the listing, however, is likely to be relative to the visibility of the rest of the listings competing for the viewers attention. a listing that is featured is likely to be more visible if it is the only featured auction, thus, factors driving the decision to use visibility attributes are likely to be influenced by marketplace characteristics.
Discussion
several interestinG insiGHts can Be Gained from the results presented in this paper. the results of our study imply that the use of discretionary attributes is an effective strategy through all stages of the auction process. the use of these attributes was found to be positively associated with increased listing views and bids, and higher price premiums were directly associated with the use of some discretionary attributes and indirectly associated with others through increased bids. the key to successful auction outcomes for sellers is attracting buyers with high willingness to pay for their products, which requires attracting these consumers to first view and then continue to bid on auction listings. Visibility-enhancing and quality-signaling attributes appear to influence consumer decisions throughout this entire process. We found strong evidence that the reputations of competing sellers in the auction marketplace significantly affect the impact of discretionary attributes on auction outcomes. as the marketplace becomes increasingly concentrated with reputable sellers, discretionary auction attributes have a greater impact on price premiums. there also appears to be a natural order for sellers in their use of discretionary attributes that correlates to their experience in previous auctions. Based on our cluster analysis and the analysis of marketplace reputation moderating effects, sellers with below average feedback scores appear to rely less on discretionary attributes. In general, as sellers gather more experience (based on the number of past transactions), we observe increased use of quality-signaling attributes to achieve higher price premiums. this suggests that a learning process occurs for sellers, and provides further evidence that feedback scores may not be sufficient differentiators in contemporary auction environments. Overall, relying on feedback scores alone is not a good strategy and a savvy seller recognizes that good reputation scores have become a necessary, but not sufficient, condition for success in online auctions.
contributions
the results presented in this paper shed new light on the role of discretionary attributes in online auctions. this paper presents the first analysis of how the reputations of competing sellers in an online auction environment significantly moderate the relationship between discretionary attributes and auction outcomes. this is also the first research to classify typical seller strategies based on the use of discretionary auction attributes. Furthermore, this research presents the first analysis of how marketplace characteristics and sellers experience influence their choice of differentiation strategy.
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this paper includes several methodological contributions. It demonstrates the use of unsupervised learning techniques for the classification of selling strategies using the k-means clustering methodology. unsupervised learning techniques are rarely utilized in this research context and provide an advantage in exploratory research [18]. this paper is also the first, to our knowledge, to utilize a Heckman instrumented selection model to control for potential sample selection bias in the analysis of auction outcomes. Prior research that has analyzed auction outcomes has not considered the potential effects of selection bias from unsuccessful auctions, and we demonstrate a feasible methodology for controlling for such issues. Finally, we demonstrated how moderating effects can be explored using a sample split, SuR, and a Wald test to compare coefficient estimates. although none of these techniques are new, they are not often applied in this research context, and this paper provides insights on their use for future research.
limitations and Future Work

One potential limitation of this study is that it does not capture potential learning and refinement of sellers in their strategy selection for using discretionary attributes over the long run. It is likely that sellers evolve their strategies with experience, as implied by our results, and it would require a longitudinal study to understand how these changes and learning processes occur. We therefore recognize that the results presented in this paper are appropriate for comparing short-run selections of strategies across different sellers and competitive environments, and do not claim that the strategies identified in this research will remain constant in the long run. We measured only the direct price premium effects of discretionary attributes in our testing of the moderating effects of adjacent sellers reputation. One natural limitation of the Heckman-adjusted SuR model is that by its design it does not consider any mediating effects of view count. View count was included as a control, and measuring these indirect effects was not a primary goal of this study. Future studies with such a focus can potentially study the moderating effects of adjacent sellers reputation with a simultaneous consideration of the mediating effects of view count on price premiums. the context of our study involves a relatively high-value product sold in a relatively competitive auction environment. Hence, one may question the generalizability of the results to other auction environments. the trade-off between power and generality has been long recognized. In general, specific solutions are difficult to generalize, and general solutions do not have the necessary power to solve real-world problems. the context of this research provides a semicontrolled environment likened to a natural experiment, in which we can examine the pertinent issues of online auctions. among other reasons stated earlier, the shortage of the Wii made eBay the predominant sales channel, thereby controlling for any channel substitution effects. the large number of truly homogeneous product listings on eBay in a short time period helps to naturally control for issues of product differences and variations over time that are common in many online auction studies.
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the use of cluster analysis is often associated with various methodological issues. Experts agree on what these issues are, but do not always concur on how to address them. as ketchen and Shook have pointed out: [there is a] dilemma of using cluster analysis: for any remedy, there is almost always an associated cost [32, p. 444]. although we have subscribed to the practice suggested in the literature, we maintain that the results obtained are exploratory and for the purpose of providing an initial baseline analysis, which informs the more detailed econometric study presented with our main findings. this research sheds new light on the role of discretionary attributes in online auction environments and the moderating effects of the competitive environment. a natural next step for this research program would be to investigate these effects in a controlled laboratory setting to pinpoint specific decision-making phenomena in this context. this research model could also be applied to other electronic marketplaces and online retail environments that are not auction based. Furthermore, it would be interesting to explore, through a longitudinal study, how the long-term use of discretionary visibility-enhancing and quality-signaling auction attributes affects the development of a sellers reputation.
conclusion
tHis paper explored tHe issue of seller differentiation in highly competitive auction environments where there are high concentrations of reputable sellers. analyzing a large data set of eBay auction listings for identical products, we found strong evidence that the reputations of competing sellers in an auction marketplace significantly moderate the effects of auction characteristics on auction outcomes. Specifically, we focused our analysis on seller strategies for using visibility-enhancing and qualitysignaling discretionary auction attributes. We observed that the use of these attributes significantly affects auction outcomes throughout the entire auction process. We also observed that the effectiveness of these attributes in determining auction outcomes is significantly influenced by the reputations of competing sellers in the auction marketplace. as auction environments become more concentrated with experienced reputable sellers, these discretionary attributes become more effective tools for differentiation. at the same time, seller feedback scores were found to become less effective tools for differentiation. Furthermore, sellers appear to select their strategies for employing these discretionary attributes based on both their experience and the characteristics of the marketplace. these findings suggest that feedback scores in online marketplaces are no longer sufficient for differentiation and that sellers must take a more strategic approach in their auction listings.
Acknowledgments: the authors appear in alphabetical order. they thank Vladimir Zwass and three anonymous reviewers for helpful comments on this research. the authors also thank yin-ling (Elaine) cheung for her research assistance. kim Huat Goh thanks Nanyang technological university for funding support under his start-up grant. Jesse Bockstedt thanks the George Mason university School of Management for providing summer research funding, which supported this work.
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notes
1. See sales and financial information at Nintendos Investor Relations site, www.nintendo .co.jp/ir/en/index.html. 2. Full details of estimation steps, instrument selection and usage, and diagnostic tests are provided in a technical appendix, which is available from either author upon request. 3. Heckman [27] illustrated that in analyzing the demographic factors that impact the wages of working women, it was necessary to consider the issue of self-selection bias that arises when women choose not to enter the workforce (hence, the absence of data) due to the same demographic factors. Similar logic follows for factors that lead to price premiums in online auctions. We use Heckmans [27] approach to account for the potential selection bias that arises from auctions that do not result in a sale. 4. Feedback scores are likely to experience diminishing returns. a seller with a feedback score of 200 is probably not twice as reputable than another with a score of 100. We also use other comparable forms of transformation such as logistic transformation and yielded similar empirical results. 5. although it is not possible to know for sure the position the adjacent listing is with reference to the referent auction, the sorting of all auctions by auction end times within the eBay Wii systems category provides a good estimate of the default listing positions in general. 6. Note the mean final auction price is $331.01 with a standard deviation of $36.62. 7. all of the coefficients reported for the price premium regressions represent dollar value effects of the corresponding independent variables. 8. analyzing other window sizes (e.g., 25, 100, 150 auctions) yielded similar findings.
references
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Seller Strategies for Differentiation in Highly Competitive Online Auction Markets

JESSE BOckStEDt aND kIM Huat GOH

BOckStEDt aND GOH

DIFFERENtIatION IN HIGHly cOMPEtItIVE ONlINE auctION MaRkEtS

Increasing concentration of Reputable Sellers

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Figure 1. Distribution of Positive Feedback Percentages

DIFFERENtIatION IN HIGHly cOMPEtItIVE ONlINE auctION MaRkEtS

Figure 2. Distribution of log (number of positive feedback)

Role of Discretionary attributes: Visibility Enhancing and Quality Signaling

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DIFFERENtIatION IN HIGHly cOMPEtItIVE ONlINE auctION MaRkEtS

Data and Initial analysis Field Data

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auction attributes and Data Variables

DIFFERENtIatION IN HIGHly cOMPEtItIVE ONlINE auctION MaRkEtS

Preliminary cluster analysis

table 1. Description of Variables in Main Research Model

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Price premium Bid count View count Featured

Listing duration Log feedback score Feedback percent Storefront About me

DIFFERENtIatION IN HIGHly cOMPEtItIVE ONlINE auctION MaRkEtS

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table 2. K-Means clustering Results

cluster 1 Visibility investor

cluster 2 Derelict seller

cluster 3 Feedback rider

cluster 4 Reputation rider

cluster 5 Reputation investor

Cluster size (percent of total) Visibility index

11,903 (100) 0.1958 (0.1164) 0.2317 (0.2029) 0.5533 (0.2403)

3,932 (33) 0.1861 () (0.1107) 0.1790 () (0.1127) 0.2738 () (0.0691)

2,479 (21) 0.1765 () (0.0913) 0.0000 () (0.0000) 0.7034 (+) (0.0387)

85.71 (+) $85.19 (+) $73.02 (+)

82.27 () $82.19 (+) $68.21 (+)

80.11 () $78.61 () $62.97 ()

83.39 (+) $79.03 () $66.34 ()

83.96 (+) $82.93 (+) $69.63 (+)

83.67 (+) $84.21 (+) $70.46 (+)

DIFFERENtIatION IN HIGHly cOMPEtItIVE ONlINE auctION MaRkEtS

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Econometric analysis and Results

that measures the effects of auction (1a)

DIFFERENtIatION IN HIGHly cOMPEtItIVE ONlINE auctION MaRkEtS

Issue of Endogeneity and Self-Selection: Heckman-IV Selection Model

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Modeling auctions under Different competitive Reputation Environments

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26 j * ln ( positive feedback score ) j =1 25

26 k + * ln ( positive feedback score ) . k =1 25

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Regression Results: Effects on Views, Bids, and Price Premiums

Estimator Price premium coefficient Standard error

Heckman-IV Price premium coefficient

Dependent variable Standard error Standard error

DIFFERENtIatION IN HIGHly cOMPEtItIVE ONlINE auctION MaRkEtS

table 3. continued FGlS log bids coefficient

Estimator Price premium coefficient

Heckman-IV Price premium coefficient Standard error

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Dependent variable Standard error

log views Standard error Standard error