The Psychology of eBay

This posting refers to the paragraphs in Chapter 1 which deal with bounded rationality. This concept reveals that people do not always follow a logical path in their decision-making when purchasing goods. There are several reasons this happens. I found an article over the psychology of buying on eBay and the results were very interesting. There are two ways to buy on eBay: by auction, or the buy-it-now feature which allows one to immediately buy the product at a set price if there are no bids already placed on it. The study found that people usually pay around 7% higher in 51% of the auctions than the buy-it-now price. This is because they are basing their decisions on something rather than the price. They may get caught up in the competition, or they may be basing their decision on other factors which are sometimes not relevant such as the seller rating as compared to another.

The solution to this problem is to look at the buy-it-now price and decide if we would be willing to pay the price listed. If not, using eBay’s maximum bid function which allows us to set a maximum bid on the item, we should place a bid lower than the buy-it-now price and not bid again. This is because we are presumptuously stating with the maximum bid that that price is the highest price we are willing to pay. If the price goes over that, then we should look for a new auction. If we continue bidding, then we could lose money by going over the buy-it-now price, which we already decided was too much at the beginning.

I am not exempt from the numerous fallacies presented in the article. A couple of months ago, I bought a printer and put my bid actually above the buy-it-now price. I could have just bought the product and not worried about losing the item. I would encourage all eBay buyers to read the article, even though it is a little long.



Daniel said...

The impact psychology has on economics is an interesting issue. I think most readers can indentify with Adam’s article and the phenomenon of getting caught up in the moment of bidding on Ebay only to settle on a purchase price more than the “purchase now” price. Ebay is supposed replicate an efficient market, but as Adam’s statics show, more often than not, purchasers that are enticed into a “bidding war” generally pay more than the “purchase now” price.

Like Ebay, fantasy football has turned into a favorite American pastime. Every September, millions of football fans ensemble fantasy leagues and prepare to “draft” NFL players onto their team. In drafting a fantasy team, a team owner is allotted 200 mythical fantasy dollars and bids against others in the league for NFL players. Websites facilitating fantasy drafts often place a “value” on each NFL player so those bidding can gauge value; for example, a website might suggest NFL player Steve Slaton is worth $50 mythical fantasy dollars so those bidding shouldn’t spend more than $50 on Slaton.

When my fantasy league drafted this year, teams started spending much more than recommended amounts on players. As the draft progressed, it became clear, players that were drafted early were had been overvalued and that bargains were going to be available later in the draft. Those that had identified proper value early still had fantasy dollars left to take advantage of the later bargains. The point is: over exuberance isn’t exclusive to Ebay, it happens in other forums and it’s a principle buyers should remember when dealing with auctions. See the article below dealing with fantasy football and economics.


Jonathan said...

Adam, I find this article not only very interesting but very applicable. I think we can all relate to behaving in a bounded rationality but I think my wife is the best example of this. I'm always amazed at the way her mind thinks. EBay has been revoked from my house because my wife is a victim of purchasing items on eBay for WAY more than she could have at a normal store because her red personality won't let her lose something she has been bidding on.

One reason the book says we behave the way we do is because we all have a different perception of costs and benefits. For example, my wife is an avid runner. She runs everyday and with the weather getting colder, she can either buy a treadmill and run at home or she can get a gym membership. Right now a membership at Golds Gym is $150 for 6 months and a treadmill is $600 or more. For me its an easy decision to get the gym membership but she is set on getting the treadmill. Financially it doesn't make sense but the benefit in my wife's head out weighs the cost. Interesting...

Dr. Tufte said...

-1 on Adam and Daniel for spelling errors.

Jonathan has a good point - we need to be careful about reading too much into the benefits and costs that others perceive. They may not be the same as ours.

As to E-Bay, it turns out that the best way to extract consumer surplus and turn it into producer surplus is with an auction. This is accentuated if the bidders cannot assess the quality of the item accurately. In that case, the volatility in quality assessment translates into volatility of prices bid. It's then much more likely that you're going to get someone to bid more than the item is worth.