The Economist has a great story on how micro economists are making small changes that improve the functioning and liquidity of online markets.
“One example is the question of how much detail an online car auctioneer should reveal about the condition of the vehicles on offer. Common sense would suggest some information—a car’s age and mileage—is essential, but that total transparency about other things (precise details on subpar paintwork) might deter buyers, lowering the auctioneer’s commissions. Academic theory suggests otherwise: in some types of auction more information always raises revenues.
To test the idea, Steve Tadelis of the University of California at Berkeley (now also working for eBay) and Florian Zettelmeyer of Northwestern University set up a trial, randomly splitting 8,000 cars into two groups. The first group were auctioned with standard information, including age and mileage. The second had a detailed report on the car’s paintwork. The results were striking: cars in the second group had better chances of a sale and sold for higher prices. This effect was most pronounced for cars in poorer condition: the probability of a sale rose by 23%, with prices up by 5%. The extra information meant that buyers were able to spot the type of car they wanted. Competition for cars rose, even the scruffier ones.”
Pretty cool stuff