Three Empirical Studies in Market Design

Abstract

Market design is the development of mechanisms that improve market efficiency and build on an understanding of the interaction between human behavior and market rules. The first chapter considers the sale of a charitable membership where the charity poses the market design question of how to price these memberships to capture the maximum value from donors' altruism. Using an online natural field experiment with over 700,000 subjects, this chapter tests theory on price discounts and shows large differences in donation behavior between donors who have previously given money and/or volunteered. For example, framing the charity's membership price as a discount increases response rates and decreases conditional contributions from former volunteers, but not from past money donors. This chapter thereby demonstrates the importance of conditioning fundraising strategies on the specifics of past donation dimensions.

The second chapter examines an auction used to solve the assignment and price determination problems where price depends on the propensity to own or farm the land, a non-market good. This chapter studies bidder behavior in a reverse auction where landowners compete to sell and retire the right to develop their farmland. A reduced form bidding model is used to estimate the role of bidder competition, winner's curse correction, and the underlying distribution of private values. The chapter concludes that the auction enrolled as much as 3,000 acres (12 percent) more than a take-it-or-leave-it offer (i.e., non-auction program) would have enrolled for the same budgetary cost.

Finally, the third chapter considers the online advertising word auction. The pricing determination and assignment problem must occur for over 2,000 consumer searches each second. Theory is developed where asymmetric advertisers compete and an advertiser-optimal equilibrium bidding strategy is presented that is robust to this asymmetry. Within this rich strategy space, it is shown that advertiser subsidization can be revenue increasing for the search engine. Using a novel dataset of more than 4,500 keyword bids by three firms on four search engines, a simulation of the auction environment illustrates that bidder subsidization is indeed revenue positive and can be improved upon by imposing bid caps or fixed bids on the subsidized bidder.