Maximizing sales on eBay: UC Berkeley Haas School of Business Professor John Morgan shows sellers how to boost profits on eBay
February 24, 2006
Ute S. Frey
UC Berkeley Haas School of Business
Berkeley, Calif. -- 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.
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.
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
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/