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

Author

Listed:
  • Hossain Tanjim

    (Hong Kong University of Science & Technology, tanjim.hossain@utoronto.ca)

  • Morgan John

    (University of California, Berkeley, morgan@haas.berkeley.edu)

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.

Suggested Citation

  • Hossain Tanjim & Morgan John, 2006. "...Plus Shipping and Handling: Revenue (Non) Equivalence in Field Experiments on eBay," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 6(2), pages 1-30, January.
    • Handle: RePEc:bpj:bejeap:v:advances.6:y:2006:i:2:n:3
    DOI: 10.2202/1538-0637.1429
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    Keywords

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    JEL classification:

    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software

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