Why we do what we do on eBay
Economists mine the online auction site to find out why shoppers act irrationally.
from the July 16, 2007 edition
Page 3 of 4
"There are a number of ways to explain this," says John Morgan, of UC Berkeley, who cowrote the study, "but my favorite is that people have two different budgets in their head: how much I'm willing to pay for the item, and how much I'm willing to pay for shipping."
If the shipping cost isn't too high, many buyers will start bidding and forget to calculate shipping into the final price.
Retailers have exploited this mental disconnect for decades. Online, some auctioneers have even tried to bury shipping costs deep in an item's description so that casual bidders will overlook the fee. (EBay recently made this questionable practice, known as "shrouding," much harder to pull off.)
Hossain and Mr. Morgan tinkered with the mechanism on Yahoo's Taiwanese auction website. The pair auctioned iPods with a mixture of starting prices, shipping fees, and shrouding techniques. They discovered that hiding extra fees amid all that fine print did not always result in a higher sales price. In fact, average revenue was 3 percent lower when an auction shrouded the shipping fees than those that did not. They found a similar result when comparing hidden-fee items sold before eBay's antishrouding redesign with items auctioned after the change.
There's no theory to explain this wrinkle, but Hossain takes comfort in the findings.
"This is a puzzling result and, in some sense, a happy result," he says. "It shows that making prices – and fees in other application, such as banks' charges [on a credit card application] – more transparent may actually be beneficial to sellers on average."
Best time to close an auction
Another study challenges commonly held beliefs on when to close an online auction. Many eBay-for-beginners books alert sellers that online bidding spikes as the workday ends on the East Coast and holds strong until the West Coast goes to bed. Guidebook wisdom suggests that smart sellers time their auctions to end during those rush hours.
"You would think it's a good idea, but it's in fact counterproductive," says Uri Simonsohn, a behavioral economist at the University of Pennsylvania. He compared the proportion of bids filed each hour to the proportion of auctions ending each hour. Yes, the number of bids jumps, but Mr. Simonsohn found that the share of auctions soared even higher.
"Sellers have outwitted themselves," Simonsohn concludes. "They think they are smart, but really they don't know that everyone else thinks they're smart, too."
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