Plus shipping and handling: revenue (non)equivalence in field experiments on eBay
From the Briefcase: Research produced by America's Best Business Schools
Authors: John Morgan (Haas School of Business, University of California–Berkeley) and Tanjim Hossain (Hong Kong University of Science and Technology)
Status: Advances in Economic Analysis & Policy, 2006, Vol. 6: No. 2, Article 3.
Summary: Most customers pay attention only to the total price of something they buy. If a baseball bat costs $150 plus $15 shipping and handling–that's a $165 bat. But on the Internet, researchers find in a new study, businesses may have more flexibility to find that pricing sweet spot. Lower sticker prices and higher shipping costs can add up to more sales.
Sellers on eBay 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 Prof. John Morgan and HKUST Assistant Prof. 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.
In 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.
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