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eBuyer Beware

August 27, 2010
by Kathy Newman

When Haas professor John Morgan used eBay to buy a Pittsburgh Steelers “terrible towel” (a bright yellow cloth waved by fans to show their enthusiasm) for his four-year-old son, he was happy to pay $9.95 for a set of two, and $3.95 for shipping charges. But Morgan noticed that on some eBay listings the shipping charge for even one towel was as high as $8.00. An expert on retail pricing, Morgan was wise to a common but sly pricing technique used on eBay—a low opening bid offset by a high shipping charge.

During the past year Morgan and his colleague from Hong Kong University, Tanjim Hossain, have been using eBay as a giant research laboratory. In a recent study, they auctioned the same CDs—including Britney Spears’s Oops I Did It Again and U2’s Joshua Tree—using different pricing schemes. In half of the auctions, they started the bidding on the CDs with a low opening bid ($.01) and a high shipping charge ($3.99). In the other half, they started the bidding with a high opening bid ($4.00) and no shipping charge. Morgan and Hossain found a low opening bid price and high shipping charge led to earlier bidding, more total bids, and a higher final sales price for the CDs—21 percent higher, in fact.

Classic economic theory assumes that consumers are calculating, rational actors who ferret out the lowest price. “But sometimes economic theory gets it wrong,” Morgan says. Morgan is part of a new generation of economists who are turning to research in behavioral psychology for answers. “Psychologist George Lowenstein proved that shoppers have two different ‘mental bank accounts’ for categories like the sale price and the shipping price. It’s like when gamblers go to Vegas and they have one bucket of quarters that represents the money they brought, and one bucket that represents their winnings. Traditional economic theory can’t explain this kind of behavior.”

Ebay spokesperson Catherine England noted that for some consumers, the psychological aspect of buying and selling provides the real enjoyment. But she claims eBay has strict policies to prohibit excessive shipping and handling fees (such as $25 to ship a CD). The consequences could range from a cancellation of that particular listing to the suspension of the member’s account. England says eBay does not “filter” the site for excessive shipping charges—it’s up to individual buyers to report offenders.

For online retailers, Morgan’s findings, published in the latest issue of Advances in Economic Analysis & Policy, show that lowering the bidding price and upping the shipping price works well for sellers. But for consumers, the message is: Look at the sum, not the parts.

From the May June 2006 What’s Happened to the Animals of Yosemite issue of California.

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