Maximizing Sales on eBay

Newswise — eBay sellers can boost profits by setting a low opening bid price and charging higher shipping charges, according to a recently published study by economics professors at the UC Berkeley Haas School of Business and Hong Kong University of Science and Technology.

Haas Professor John Morgan and HKUST Assistant Professor Tanjim Hossain held 80 auctions of new music CDs and Xbox video games to test how consumers respond to different price schemes.

Their auction results build on Morgan's previous research on Internet marketplaces, including price-comparison shopping sites. Their eBay findings were published in the article, "...Plus Shipping and Handling: Revenue (Non) Equivalence in Field Experiments on eBay," in the latest edition of Advances in Economic Analysis & Policy.

In the eBay auctions, Morgan and Hossain varied the opening bid price and shipping charges on identical CDs, ranging from Britney Spears to Nirvana, and video games, including Halo and NBA 2K2.

"In theory, dividing a price into these two pieces should have little effect on overall demand for a good," they note. "A perfectly informed and fully rational consumer will merely add together the two parts of a price to obtain the total out of pocket price for an item and then decide whether to buy and how much to bid based on this total price." But that's not what happened in their eBay auctions. Instead, they found that lowering the opening bid price while raising shipping charges attracts earlier and more bidders and ultimately leads to higher revenues compared with doing the reverse. Those findings suggest consumers pay less attention or even completely overlook shipping costs when making bids, the professors conclude. In addition to applying to auctions, the results could have implications for fixed-price retailing, including electronics and books, where it's also common marketing practice to divide a price into two pieces. "Framing the same price as a total of different attributes may significantly affect consumer behavior," Morgan says. eBay Experiment Details In their eBay experiments, Morgan and Hossain held half of their auctions with a total starting price of $4 and the other half with a total starting price of $8. Half of the $4 auctions started with a low opening bid price of one penny (and a $3.99 shipping charge), while the other half started with a high opening bid price of $4 and no shipping charge. Similarly, at the $8 starting price, half of the auctions started with a low opening bid of $2 and high shipping charges of $6 while the other half was reversed, with a high opening bid of $6 and low shipping fee of $2. Some Findings Their $4 auctions with a low opening bid of one penny (and high shipping charge of $3.99) attracted more bidders, earlier bidding and higher revenue for both CDs and Xbox games. The jump in revenue was most dramatic with CDs, which averaged 21% higher final sales prices when the opening bid was a penny compared with when it was $3.99. In $8 auctions, video games scored 11% higher average final sales prices when the opening bid was low at $2 (and shipping was $6) compared with when the initial pricing was reversed. But in $8 CD auctions, a lower opening bid and higher shipping fee did not lead to a higher final sale. In fact, the professors were unable to sell five of 20 CDs -- Britney Spears, R.E.M. and Nirvana " when the total starting price was $8. The professors noted that a shipping charge of $6 is uncommon on music CDS but not Xbox games. And $8 represents more than 50% of the retail price of CDs but less than 27% of the retail price of Xbox games.

Additional Research

The eBay study is just the latest piece of research on Internet pricing from Morgan, who has been investigating the subject since the late 1990s. Working with professors from Bentley College and Indiana University's Kelley School of Business, Morgan helped build what is probably today's most comprehensive database of retail prices on the Internet. They continue to track Internet pricing on a weekly basis on their Web site, www.nash-equilibrium.com, named for John Forbes Nash Jr., the Nobel Laureate in economics and inspiration for Hollywood's A Beautiful Mind. Using that database, the trio found that pricing on the Internet varies dramatically, contrary to predictions that the vast wealth of price information online would eat away at profit margins and result in one low price for consumers. "It suggests e-retailers have to evolve their pricing tactics in a way that differs from their off-line counterparts," Morgan says. "The only survivable pricing strategy online is a strategy of unpredictability" More recently, Morgan compared auctions on eBay and rival Yahoo! with UC Berkeley Dept. of Agricultural & Resource Economics graduate student Jennifer Brown. After auctioning off identical Morgan Silver Dollars on both sites, they found that eBay auctions averaged almost 60 percent more bidders than Yahoo! and generated 30 percent higher sales prices on identical items. Those findings could have antitrust implications in the US online auction market because they suggest Yahoo! is not a formidable competitor to eBay, Morgan says. To access the study, "...Plus Shipping and Handling: Revenue (Non) Equivalence in Field Experiments on eBay," visit: http://www.bepress.com/bejeap/advances/vol6/iss2/art3/.

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