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...plus shipping and handling: Revenue (non) equivalence in field experiments on ebay

Author Info

Listed author(s):
  • Tanjim Hossain
  • John Morgan

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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Paper provided by The Field Experiments Website in its series Natural Field Experiments with number 00270.

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Date of creation: 2006
Handle: RePEc:feb:natura:00270
Contact details of provider: Web page: http://www.fieldexperiments.com

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Find related papers by 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

References listed on IDEAS
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  1. 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.
  2. Krishna, Vijay, 2002. "Auction Theory," Elsevier Monographs, Elsevier, edition 1, number 9780124262973.
  3. Xavier Gabaix & David Laibson, 2006. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 121(2), pages 505-540.
  4. 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.
  5. Richard H. Thaler, 2008. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 27(1), pages 15-25, 01-02.
  6. David Lucking-Reiley, 1999. "Using Field Experiments to Test Equivalence between Auction Formats: Magic on the Internet," American Economic Review, American Economic Association, vol. 89(5), pages 1063-1080, December.
  7. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
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