Ulrike Malmendier, an economist at the University of California at Berkeley, tracked auctions of common items – things readily available online or in stores but offered on eBay at a discount.
Most economists assume these kinds of auctions are largely immune to the passions and unpredictabilities of ravenous bidders, she says. Simple bargain hunting, they hope, would bring out our inner homo economicus, someone who acts in their self-interest to get the best deal possible.
No such luck, she says.
Ms. Malmendier tracked 166 auctions offering "CashFlow 101," a personal-finance-themed 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. It looked like a great deal for buyers. They could pay less than retail to end the auction immediately or place bids in the hope of fetching an even lower price.
But this is where eBay users fell prey to what Malmendier and her coauthor, Stanford University economist Hanh Lee, call "bidder's curse." Apparently, some bidders grew so enthusiastic about winning the auction that they lost sight of the "buy it now" price, sometimes offering more than $185.
There's much more here, via Seth Godin. But enough with theory: how can the economists help you make some money?
If you are a seller:
1. Set low opening prices. Buyers favour whichever auction has the most bids, and starting with a low price is a great way to attract offers. A buyer has limited information on the quality of your item/service, and even if he can be bothered to read the description he will still worry he could be missing something. Observing lots of other bids allays those fears.
2. Don't use secret reserves. Buyers are afraid they may be wasting their time with your auction, and your item will attract fewer bids and end up selling for a lower price than it could have achieved.
3. Try to appear honest and dependable. If the buyer spots relatively large shipping costs or some other 'clever' trick, he will start worrying what else he may be missing - try to present your offer in a simple and straighforward manner. (the article has more on optimising shipping costs).
And if you are a buyer:
1. Don't bid until the last minute - early bids attract competition.
2. Don't fall in the 'many bids' trap: read the item description and seller information carefully and disregard demand by other buyers completely - they are unlikely to know more than you do. You are simply observing their preferences and biases, none of which carries information of relevance to you. Have a clear idea of how much you value an item before bidding, and don't succumb to 'bidder's heat' - you want to buy a product at a good price, not come first in a fools' race.
3. Dump Ebay and switch to Yahoo's online auctions (no longer available in the US, alas). Identical items auctioned on both sites sell on Yahoo for 30% less. The smaller Yahoo marketplace seems to lessen competition amongst buyers more than amongst sellers.