When buyers go crazy

A key element of some of the economics theory I studied at university was rational behaviour on the part of individuals and markets. This was propped up with an assumption that everyone had the same information – perfect markets. In the real world, markets can often be driven to some temporary irrational behaviour, either through imperfect information or exuberance.

It was interesting to read a report about a study on ebay by Ulrike Malmendier, an economist at the University of California at Berkeley, which found that consumers didn’t always buy goods at the best deal.

In one example, 166 auctions were tracked offering “CashFlow 101,” a board game. During the seven-month trial, the game’s designer sold the box set on his website for $195. Meanwhile, eBay sellers usually offered an opening price of about $45 and set a one-click, “buy it now” price of about $125.

However, some bidders grew so enthusiastic about winning the auction that they lost sight of the “buy it now” price, sometimes offering more than $185. In 43 percent of the auctions they found that bidders ended up paying more than the ‘buy it now’ price.

In a different study, Tanjim Hossain, an assistant professor at the Hong Kong University of Science and Technology posted his own controlled auctions. He offered identical items eg CDs, but played with the specifics of the sale. One copy would start at $4 with free shipping. The other would open at 1 cent but charge $3.99 for shipping. Either way, the initial cost was $4.

But bidders didn’t see it that way. On average, the low-cost, high-shipping auction attracted more bids, more bidders, and 25 percent more money.

The least startling revelation was that buyers seem to favour auctions with more bidders. People will always take comfort from an item appearing to be popular, as it suggests this item may represent a great deal. Likewise being the first bidder is uncomfortable since it means you have to “tip your hand” and you may find yourself bidding alone.

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