It is the often said that Â£0.99 no reserve auction are the best way to encourage bids and lead to higher prices. In fact Auctioning4u lists most of its items using this pricing strategy. However up to now this theory was more anecdotal than based on actual data.
A recent paper by Gillian Ku of London Business School, Starting Low but Ending High: A Reversal of the Anchoring effect in Auctions has investigated the effect of starting price on the final value of online auctions and discovered that it is indeed the case that low starting prices increase ending price. Ku et al have discovered that three effects of lower starting prices lead to higher ending prices:
- Lower starting prices reduce barriers to entry, which increases bids and generates higher prices
- Lower starting prices entice bidders to invest time and energy, increasing their commitment to the auction
- The extra bids generated by lower starting prices infer value in the item, encouraging more traffic
These findings are at odds with previous research on negotiations which finds that ending prices were highly related to starting price. In the more social environment of auctions (especially online auctions such as eBay), this trend is reversed. Ku performed six studies to investigate the effect of starting price on ending price, several of which were related to eBay (these are studies 2, 3 and 5 detailed below).
Study 2: Starting low and ending high on eBay
The results of eBay auctions were analysed to establish the relationship between staring and ending prices. For this study, two types of auctions were identified:
- Independent value auctions. These are highly individual auctions where the price is difficult to predict e.g. collectibles
- Common value auctions. Auctions of common items where there is an market price.
For the independent value auctions they choose to analyse Tabriz Persian rugs and for the common value auctions Nikon digital cameras. The following results were found for both types of auction
- Lowers starting price auctions were more likely to be successful
- Lowers starting prices auction results in more bids and more unique bidders.
- Lower staring prices resulted in higher ending prices
Study 3: Escallation of Commitment on eBay
This study set out to investigate the effect of escalation of commitment on prices rises. Is it the case that once the bidder has placed a bid they have invested time and are more likely to bid again?
Ku et al focused their attention on a particular eBay seller, Browncow, who sells Hawaiian shirts starting at $9.99 and $24.99. Analysing the results of 89 auction produced the following conclusions
- Low staring prices bring bidders into the auction early
- Low starting prices encourage bidders to accumulate sunk costs into the auction. Low starting price winners have spend more time in the auction and make more bids than low starting price losers or bidders in high starting price auctions.
Study 4 Inferring value from Traffic and Current Prices
Test subjects were asked to judge the proper value of an mocked-up eBay item (holiday package) with which they were presented. It was found that the number of bids which the items had lead to higher valuations.
Study 5 Starting Low and Ending Low on eBay
This study found that for auctions where there were less bids, the starting price did have an effect on ending price. By comparing the outcome of similar items where there were misspellings in the titles, it was found that this created a barrier to auction traffic, reducing final prices
Lessons from research
The results of this research will not come as much of a surprise to eBayers, but it is nevertheless interesting to have analysis to back up commonly quoted conceptions. I think that the following lessons can be drawn from the paper:
- Â£0.99 NR auctions work well for popular items with plenty of search traffic and lead to higher prices
- Less popular items (rare) are not suitable for this kind of auction strategy.
I think that the results of this research are most relevant to individual sellers, selling in low volumes with using simple sales strategies. When selling in large volumes, the market prices will drop if too many items are listed and it is therefore necessary to increase starting prices or use fixed price auctions to compensate.
Comments on the Research
There are many factors affecting the ending prices of eBay auction such as starting time, ending time, seller feedback, postal rate etc. There is no indication in this paper that these factors have been taken into account.
The paper talks about auction traffic, referring to the number of bids on an item. I think that another interesting study would be to compare the number of views of an auction with starting price to establish is there is a relationship