How efficient is Vinmonopolet’s pricing policy? : a structural estimation of the Norwegian wine auctions

Abstract

This paper uses an empirical approach to investigate how Vinmonopolet’s current pricing policy affects their electronic wine auctions by looking at how the binding reserve price affects the auction outcomes and how the current policy fares against the theoretical optimal reserve price. We use comprehensive data from Vinmonopolet, containing information on all electronic wine auctions hosted in Norway since 2013. By estimating the bidders’ willingness to pay and bidder participation, we are able to conduct counterfactual analyses on how changes in the reserve price and bidder participation affects both expected revenue and allocative efficiency. We find it is implausible that Vinmonopolet determines the reserve price on either criterion of revenue maximization or optimal allocation, since the reserve price is not conditioned on the sellers’ valuation. However, Vinmonopolet’s current pricing policy – setting the reserve price equal to 80% of their value assessment – fares well against the theoretical optimal reserve price in the majority of the auctions. This is largely due to reserve prices having a small effect on the wine auctions in general. Finally, we show that bidder participation is the main driver of the expected revenue of an auction, and increasing bidder participation reduces the probability of the reserve price affecting the auction outcomes. Hence, increasing bidder participation serves as a possible remedy for inefficient reserve prices.