Economists puzzled by irrational eBay buyers By Chris Gaylord, Christian Science Monitor
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
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
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
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
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.
But this is where eBay users fell prey to what Malmendier
and her coauthor, Stanford University economist Hanh Lee,
call "bidder's curse." Apparently, some bidders
grew so enthusiastic about winning the auction that they lost
sight of the "buy it now" price, sometimes offering
more than $185.
"We found that in 43% of the auctions the bidders ended
up paying more than the 'buy it now' price," Malmendier
"This is really huge. It's far more than I could have
Confused, the team tried a larger sample this time
observing thousands of iPod auctions. In that case, 45 to
50% of eBay auctions exceeded the "buy it now" price,
she says. Expanding the pool again, they found that the quirk
affects expensive and cheap items, men's cologne and women's
perfume, and books by liberal Sen. Barack Obama and by conservative
commentator Bill O'Reilly. The Romans had a term for this
auction-house "curse," Malmendier says, "They
called it calor licitantis bidder's heat."
Before eBay, economists had few ways to test their theories
about auctions. They could recruit and test volunteers, but
that often meant subjects already knew they were being watched.
Some experiments in the mid-1990s involved digital auctions
on primitive Internet message boards. But the pool of potential
bidders was too small back then to draw any broad economic
conclusions, says Tanjim Hossain, an assistant professor at
the Hong Kong University of Science and Technology.
Now, thanks to eBay, economists can watch and document this
2-millennium-old idea play out.
"The wonderful thing about eBay is it lets us ... participate
as a buyer or a seller and whoever is on the other
side is unaware," says Professor Hossain. "EBay
has succeeded in becoming a true bazaar, bringing buyers and
sellers from all walks of life."
This grand variety of personalities and preferences has created
near real-market conditions, he says. Better still, the site
catalogs everything. Easy access to the who, what, and when
makes distilling the why much easier.
Bidders disconnect shipping, price
Instead of observing auctions initiated by others, like Malmendier,
Hossain posts his own controlled auctions. He offers identical
items, but plays with the specifics of the sale. For example,
he auctioned pairs of popular music CDs. One copy would start
at $4 and include free shipping. The other would open at 1
cent but charge $3.99 for shipping. Either way, the initial
cost was four bucks.
But bidders didn't see it that way. On average, the low-cost,
high-shipping auction attracted more bids, more bidders, and
25% more money.
"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
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% 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
anti-shrouding 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."
Advice for buyers and sellers on eBay
Tips for sellers
Set low opening prices. When choosing between identical
items, buyers seem to favor whichever auction has the most
bids. The best way to grab early bids: Start with a cheap
price. By the time a $1 DVD auction reaches $10, it will probably
attract more newcomers than a DVD that started at $10.
Don't use secret reserves. A study of online auctions
with and without hidden minimum prices showed that many buyers
steer clear of items with a secret opening price. It's like
that old shopping joke, "If you have to ask how much
it costs, you can't afford it."
Stick with eBay. Research into various different auction
websites revealed that eBay attracted almost 60% more bidders
and 30% higher prices than identical items on Yahoo's online
auctions. Unable to keep up, Yahoo shut down its US auction
site last month. But in countries where Yahoo is dominant,
it enjoys similar results.
For buyers, it's about timing
Since eBay uses second-price auction rules where the
highest bidder has to pay only the second-highest bid plus
an extra fee the site's official guide suggests bidding
your maximum offer right off the bat. Then you can relax.
As others join in, your maximum bid remains hidden and the
site automatically (and incrementally) outbids the next-highest
offer. If someone outbids your maximum, that's OK. It's clearly
worth more to that person than it is to you.
But Ken Steiglitz, author of "Snipers, Shills and Sharks:
eBay and Human Behavior," says that's "disconcertingly
naive." An early offer attracts competition, he says.
Studies show that the more bids an item gets, the more likely
it is that other bids will follow. So even if no one else
tops your maximum bid, the second-highest bid could rise significantly.
Mr. Steiglitz's advice: "Bid late. The first few weeks
of an auction mean nothing.... It's all about what happens
in those last few seconds."