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...Plus Shipping and Handling: Revenue (Non) Equivalence in Field Experiments on eBay

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  • Hossain Tanjim

    ()
    (Hong Kong University of Science & Technology)

  • Morgan John

    ()
    (University of California, Berkeley)

Abstract

Many firms divide the price a consumer pays for a good into two pieces---the price for the item itself and the price for shipping and handling. With fully rational customers, the exact division between the two prices is irrelevant---only the total price matters. We test this hypothesis by selling matched pairs of CDs and Xbox games in a series of field experiments on eBay. In theory, the ending auction price should vary inversely with the shipping charge to leave the total price paid constant. Contrary to the theory, we find that charging a high shipping cost and starting the auction at a low opening price leads to higher numbers of bidders and higher revenues when the shipping charge is not excessive. We show that these results can be accounted for by boundedly rational bidding behavior such as loss-aversion with separate mental accounts for different attributes of the price or disregard for shipping costs.

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File URL: http://www.degruyter.com/view/j/bejeap.2006.5.2/bejeap.2006.5.2.1429/bejeap.2006.5.2.1429.xml?format=INT
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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Economic Analysis & Policy.

Volume (Year): 5 (2006)
Issue (Month): 2 (January)
Pages: 1-30

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Handle: RePEc:bpj:bejeap:v:advances.6:y:2006:i:2:n:3

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  1. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  2. Xavier Gabaix & David Laibson, 2005. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," NBER Working Papers 11755, National Bureau of Economic Research, Inc.
  3. Michael D. Smith & Erik Brynjolfsson, 2001. "Consumer Decision-making at an Internet Shopbot: Brand Still Matters," NBER Chapters, in: E-commerce, pages 541-558 National Bureau of Economic Research, Inc.
  4. Richard Thaler, 1985. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 4(3), pages 199-214.
  5. David Lucking-Reiley & John A. List, 2000. "Demand Reduction in Multiunit Auctions: Evidence from a Sportscard Field Experiment," American Economic Review, American Economic Association, vol. 90(4), pages 961-972, September.
  6. David Lucking-Reiley, 1999. "Using field experiments to test equivalence between auction formats: Magic on the internet," Framed Field Experiments 00183, The Field Experiments Website.
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