Why we do what we do on eBay

Economists mine the online auction site to find out why shoppers act irrationally.

By Chris Gaylord | Staff writer of The Christian Science Monitor

from the July 16, 2007 edition

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In the 12 years since eBay's launch, the online auction house has established itself as a one-stop shop for all things rare, kitschy, and collectible. But recently, a small group of economists have mined the site for a different prize: clues on how people spend their money.

Behind the millions of online auctions lies a virtual mini-economy flush with raw data. Harvesting this information has fed a new branch of economics, one that has proved again and again that shoppers act in unexpected ways.

Auctions can be hard to predict. Various items, be they ancient coins or next-generation electronics, can inspire odd behavior in buyers.

Late last year, crowds waited for days outside retail stores to buy the new Play­Station 3 video-game system. Many of those in line then sold the $600 machines on eBay for thousands of dollars.

But when Apple's iPhone drew similar crowds last month, resale prices on eBay were rather flat.

This unpredictability makes research difficult. After all, how do you quantify fashion? Or translate passion into a line chart?

Hoping to squelch this X-factor, Ulrike Malmendier, an economist at the University of California at Berkeley, tracked auctions of common items – things readily available online or in stores but offered on eBay at a discount.

Most economists assume these kinds of auctions are largely immune to the passions and unpredictabilities of ravenous bidders, she says. Simple bargain hunting, they hope, would bring out our inner homo economicus, someone who acts in their self-interest to get the best deal possible.

No such luck, she says.

Ms. Malmendier tracked 166 auctions offering "CashFlow 101," a personal-finance-themed board game. During the seven-month trial, the game's designer sold the box set on his website for $195.

Meanwhile, eBay sellers usually offered an opening price of about $45 and set a one-click, "buy it now" price of about $125. It looked like a great deal for buyers. They could pay less than retail to end the auction immediately or place bids in the hope of fetching an even lower price.

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