From one of my favorite economic blogs, Marginal Revolution
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.
…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…
Full paper here. But more snippets here.
While the finding is interesting. . . I think there is couple of flaw. . .
1) sample size is too small, a quick price check for completed listings on ebay will show pretty decent variations for prices of the same item
2) I bet the results wont hold for fixed price listings
3) price variations are probably driven more by (ie correlated with) opening bid price than with shipping. . .
anyways. . . who am I to question someone with a PHD?
Hey, sorry to disagree, but in my “small sample size” experiment (my eBay Store), this held true for fixed price listings as well.
I experimented with a product that normally sold for $10, and it cost about $5 to ship. I experimented with pricing ranging from $6 for the card, $10 shipping all the way to $16 with free shipping.
Interestingly, it seemed to follow a curve. There was a point where the shipping was so high, I got no takers. But the free shipping items also did not sell, because the item price looked to high compared to others.
Best price, by far, was $9.99 + $6 shipping.
Now, the real argument could be made that the eBay finding & shopping experience does not highlight shipping costs in an easy enough way for people to easily include them. I would expect this experiment on Shopping.com would show different results.
That being said, the absolute worst for comparing shipping costs is Google Adwords! Once you go to a single vendor, you have no clue whether or not you’re getting a good deal, on item or on shipping price.
Comment by Adam Nash — February 24, 2006 @ 11:35 pm
hmm. . . the curve makes some sense . . . I wonder if the paper found the same thing. . . its like behavioral finance … but for pricing. . . I wonder if it is a matter of eBay’s customer base being so different from Amazon, that Amazon is going with free shipping . . . (or that they are going for marketshare rather than profits)
Comment by will — February 25, 2006 @ 5:54 pm
Yes, we also found the curve. When we charged $6 for shipping CDs, it didn’t fetch any more money than its pair auctions with $2 shipping.
For a large sample, a Stanford undergrad tested our result by collecting a large data set for his senior thesis. He also finds that shipping increases revenue. I also found the same result for a larger data set of field experiments for a different paper.
Comment by Tanjim Hossain — February 26, 2006 @ 3:35 am
Tanjim, the shipping column is now defaulted on for eBay, I wonder if this was enough to reduce this effect, or if the mental block of adding the two columns still have some effect. . . . be interesting to repeat the study in this environment . . . I’ll send you an email to follwo up!. . . (thanks for commenting BTW!)
Comment by will — February 26, 2006 @ 7:46 pm