Economists are fascinated with eBay. The online auction service provides a substantial venue for them to study marketplace dynamics and the validity of new and established economic theory. While eBay affords economists an opportunity to conduct their experiments, much of their work provides auction users scientific insights to give them the edge in both buying and selling online. One such study, published last year in the journal Advances in Economic Analysis & Policy, indicates that within reasonable parameters, eBay bidders are more willing to pay $11.00 total for a CD when the price is broken out by product cost ($7.00) plus shipping and handling ($4.00) than $10.00 for a CD where the shipping and handling are free.
The study was conducted by Tanjim Hossain of the Hong Kong University of Science & Technology and John Morgan of the University of California, Berkeley. It involved the sale of 80 music CDs and Xbox video games. All of the titles were popular, yet all were available through other auctions or local stores – so the experiment controlled for supply and demand variables. The listings were all for simple 7-day auctions, half of which ended on Mondays and the others closed on Tuesdays. The item descriptions and titles were the same with variance only to account for the different shipping and handling terms. New seller accounts were created for each auction and each “seller” had the same feedback level – zero. Therefore the study did a good job of controlling for the factors that are generally accepted as influencing bids.
The authors of the study expected to find no real difference in the total price paid by consumers. The hypothesis being that with fully rational and informed customers, a division between item price and shipping & handling fees should be irrelevant – only the total price should matter to the bidder. Hossain and Morgan state, “Contrary to that theory, we find that charging a high shipping cost and starting the auction at a low opening price leads to higher revenues when the shipping charge is not excessive.” They assert that the bidders either disregard (or overlook) the shipping cost when determining the value of a commodity, or create “separate mental accounts” for what they are willing to pay for shipping & handling and for the cost of the item itself. This concept basically says that the bidder is willing to keep the two expenses separate in his or her mind, and as long as both charges are reasonably low, he or she is willing to pay – despite the fact that combined, the expense is greater than the single charge for the item with free shipping. Interesting stuff!
What does this mean to the average eBay user? For the buyer, consider auctions offering free shipping and a higher opening bid. According to this study, there will be less competing bids and a lower total cost to you. For the seller, examine your shipping & handling and opening bid practices. You might just see an increase in your total revenue by breaking up the price into item cost and a “reasonable shipping & handling fee.”
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Ebay is REALLY beginning to rub me the wrong way. Have you ever noticed that the average low or medium volume seller that gouges on shipping even a little gets their auction removed promptly. However, if you are a seller from China, you can gouge hundreds of dollars for shipping to evade Ebay fees. And no matter how many reports you send, they never remove those listings. Personally I’ve never jacked the shipping up to avoid fees….not that I haven’t wanted to get around the crippling final value fees. Ebay has become stifling! I’m slowly moving to Etsy and exploring other options as well.