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 in buyers.
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 of dollars.
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 chart?
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 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.
"This is really huge. It's far more than
I could have expected."
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
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% 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."