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Prof. John Morgan Shows Sellers How to Boost Profits on eBay

eBay sellers can boost profits by setting a low opening bid price and charging higher shipping charges, according to recently published research by Haas Professor John Morgan.

Morgan and co-author Tanjim Hossain, an assistant professor at Hong Kong University of Science and Technology, held 80 auctions of new music CDs and Xbox video games to test how consumers respond to different price schemes. In the eBay study, they 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, the economics professors 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 the total of different attributes may significantly affect consumer behavior, Morgan says.

Their findings were published in an 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 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 two other professors outside of Haas, Morgan helped build what is probably today’s most comprehensive database of retail prices on the Internet. With that data, updated weekly at www.nash-equilibrium.com, Morgan and his colleagues 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.

More recently, Morgan compared auctions on eBay and rival Yahoo! with UC Berkeley Department 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 30 percent higher sales prices on identical items.

Fascinated by eBay as a marketplace and test lab, Morgan also has been an occasional buyer on the site. His latest eBay purchase: a Pittsburgh Steelers Terrible Towel for his son, Aidan, whose favorite color is yellow.

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John Morgan
John Morgan