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Irrationality and Ebay July 19, 2007

Posted by jeremyliew in auctions, ebay, Ecommerce, economics, irrational.

USA Today has a fascinating article today about how some economists are puzzled by irrational eBay buyers. (via Techmeme). The article summarizes research by a number of economists. One showed how buyers in an auction frenzy will bid an item up above “buy it now” prices – almost half the time!

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.

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 says.

Other researchers also found that buyers will often ignore shipping costs in their bidding.

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.

The article summarizes other research findings as well and is a fascinating read.

Slate published a related article in May when it asked “Are Ebay auctions rational?“. Apparently standard auction theory predicts that having a secret reserve price will maximize value, but research on Ebay showed the opposite:

… Katkar and Reiley put the theory to the test by simply selling 50 matched pairs of collectible Pokemon cards, half with an open reserve price and half with a secret reserve price of the same level. Their conclusion, contrary to the theoretic argument, is that secret reserve prices are counterproductive. Far from stimulating interest, they seem to put bidders off, perhaps out of fear that a secret reserve is secret because it is far too high. Not wishing to waste their time, many of them just click “back” on their browsers and find somewhere else to bid.

I love this stuff.