The Determinants of Final Bid Price in eBay Auctions

An Empirical Study Using IPods

Abstract
This paper examines the auction characteristics that are the determinates of the final bid
price for 500 eBay auction for brand new 30GB Apple IPods. The auction characteristics
of interest in this study are shipping price, buy-it-now, and seller reputation. These three
factors are the three variables that contribute the most empirically to the literature. The
main findings are that bidders undervalue the listed shipping price, IPods sold using buy-
it-now go for a higher price than those sold in standard auctions, and the power seller
classification is the best measure of seller reputation and leads to greater profits than non-
power sellers. From these results some strategies to maximize profits are purposed for
eBay sellers.

Ryan Praskievicz
May 11, 2007
ryanpraski@gmail.com

1
I. Introduction

The goal of this paper is to create an econometric model for the determinants of

final auction prices on eBay.com. The driving force behind this project is that when

buying and selling items on eBay.com I have observed wide variations in prices of

homogeneous goods. This drove me to wonder if there were some optimal auction

characteristics to help maximize profits and possibly take advantage of market

inefficiencies. The main topics covered in this paper are the effect of seller reputation on

final bid price, the effect of buy-it-now auctions on seller revenue, and the effect of

shipping price on final bid price. The topics will be investigated using data compiled

from 500 eBay auctions for brand new 30GB IPods collected over an 18 day period in

March 2007. The motivation behind the paper is that homogenous goods sell for widely

different prices on eBay. Focusing on a homogenous good will allow the model to isolate

the auction characteristics that are causing the variations in the final bid prices. Seller

reputation will be considered in terms of both numerical and percentage feedback ratings.

Beyond the basic seller reputation measures, being a professional eBay power seller is

expected to have the largest effect on final bid price. A power seller is a recognized title

given to eBay sellers that have averaged at least $1000 in sales on eBay in the previous

three consecutive months, have their eBay account in good financial standing, have 100

or more feedback of which is 98% or more is positive, and have been an active member

for at least 90 days. It goes beyond just the feedback rating and sends a signal to buyers

that the seller is committed to continuing to providing high quality service. The buy-it-

now feature on eBay allows sellers to offer a buy price that lets the buyer immediately

2
end the auction and purchase the item. In a normal eBay auction a seller will set an

opening bid price and an auction duration, either 1, 3, 5, 7, or 10 days. Prospective

buyers submit bids and the bids are accepted until the auction period has completed. In a

buy-it-now auction sellers set a price that they are willing to sell the item for

immediately. If a buyer wants to purchase the item for the buy-it-now price they simply

accept the price specified by the seller and upon their acceptance the auction is complete.

This option is especially appealing to buyers who have a high opportunity cost of time

and have high costs associated with waiting to get their item. The effect of the shipping

price on the final bid price is somewhat puzzling. We’d expect that because the shipping

price is easily observable, bidders would factors it in with their bid price as part of the

total cost, but as theory and the empirical results from this study show, a one dollar

increase in shipping price may result in a less than $1 decrease in final bid price. These

primary factors: seller reputation, buy-it-now, and shipping price along with bidding

characteristics, the day of the week and several control variables will be examined in this

study.

II. Theory

The theoretical question central to this study is: how can the price of a

homogenous good vary? In a setting where there are many sellers and easily observable

differences in prices, economic theory suggests that the price should be driven to the

competitive level and no seller should have the opportunity to make an economic profit.

What then causes the model of perfect competition to break down and prices to vary

when examining homogenous goods sold on eBay? I purpose that the value of the total

3
 product a buyer purchases from an eBay seller is the sum of the monetary value of the

item and the value the buyer places on the service associated with the eBay auction. The

monetary value of the item is constant as the good is homogenous, but the value of the

service varies by seller.

AGGREGATE EBAY PRODUCT VALUE = MONETARY VALUE OF THE ITEM + VALUE OF THE SERVICE

Where AGGREGATE COST for the buyer = FINAL BID PRICE + SHIPPING PRICE

The value of the service is not homogenous across all sellers, so the aggregate eBay

product value varies and thus you observe wide variations in final auction bid prices for

homogenous goods sold on eBay.

VALUE OF THE SERVICE = f(SELLER REPUTATION, SHIPPING PRICE, TIME)

The value of service is a function of the seller’s reputation, the shipping price, and the

opportunity cost of time for the buyer. This study will examine reputation by focusing on

the effect that being a power seller has on the final bid price of the auction and will also

consider the effect of numerical and percentage based seller feedback rating on the final

bid price. It will go on to explain the effect the value of the shipping price on the value

of the service and its effect on the final bid price. Finally, it will consider the buyer’s

opportunity cost of time. Buyer’s who have a high opportunity cost of time associated

with searching through many eBay auctions for an item will utilize the buy-it-now option.

The effect that the buy-it-now option has on the final bid price will be examined.

SELLER REPUTATION

The data collected in this study looks at seller reputation in three forms: the sellers

overall numerical feedback rating, the sellers percentage feedback rating, and whether or

not the seller is a power seller. The overall feedback score is the sum of all the positive

and negative feedbacks left for the seller and is displayed next to the sellers username on

4
the item’s auction page. The percentage feedback rating is found just below the

numerical feedback rating on the auction page. This measures the percent of positive

feedback the seller has received to their total feedback. A power seller denotation is put

next to the seller’s numerical feedback rating on the auction page. Power sellers are eBay

top sellers who sustain a consistent high volume of monthly sales and a high level of total

feedback. A power seller must meet the following criteria:

1) Must have been an active member for 90 days.

2) Average a minimum of $1000 in sales per month, for three consecutive months.
3) Achieve an overall numerical feedback rating of 100, of which 98% or more is positive.
4) Have an account in good financial standing.

Fraud and misleading information are both major threats to the online marketplace

and eBay tries to combat it with their community feedback system. When an auction

transaction is completed both the buyer and seller have the opportunity to rate each other

on the transaction. They can give each other positive, neutral or negative feedback and

also leave a short comment justifying their rating. For a positive feedback an eBay user

is given + 1 to their overall feedback rating, -1 for a negative, and 0 for a neutral. The

feedback rating stays with the user for the entire life of their account on eBay. The rating

is displayed next to every member’s user id and can be seen by anyone accessing eBay.

EBay also maintains a unique feedback history page for each member which shows every

comment every left for the user. Creating an online community where buyers and seller

can meet in an environment where fraud is minimized is integral to eBay’s current and

future success. There are five fundamental community values that eBay lists on their

website:

1) We believe people are basically good.

2) We believe everyone has something to contribute.
3) We believe that an honest, open environment can bring out the best in people.
4) We recognize and respect everyone as a unique individual.
5) We encourage you to treat others the way you want to be treated.

5
With the goodness of people valued so highly by the eBay community there is expected

to be a positive effect on the final bid price associated with increases in percentage and

numerical based feedback of sellers. The greatest effect of seller reputation on final bid

price is expected to come from power sellers. Being a power seller is the highest level of

recognition an eBay seller can receive and is interpreted by prospective bidders as a

signal of their continued commitment to servicing buyers.

In this study seller reputation will be measured by both the percent feedback

rating and whether or not the seller is a power seller. The numerical feedback rating will

be included in a model, but will not be the focus due to the inconsistent conclusions about

it in the literature. The numerical feedback rating takes into account the negative

feedback of a seller because it the percent of positive feedbacks to the sellers total

number of feedback. This will allow for comparisons with the consistent conclusion in

the literature that negative feedback of the seller causes the final bid price to decrease,

ceteris paribus and is statistically significant. The classification of a seller as a power

seller is probably the best signal to the buyer that the seller has a good reputation. It

signals additional information beyond the observable feedback ratings. The two

important signals are that seller does a relatively large volume of business on eBay $1000

per month for the previous 3 months and the seller’s account with eBay is in good

financial standing. These additional signals complement the power seller’s 98%

feedback rating and show that they have a commitment to selling on eBay. Power sellers

can be considered more professional eBay sellers who have a history of good service and

sales on eBay. Power sellers have a higher implicit cost than non power sellers of

misleading buyers as fraud will result in them quickly losing their power seller status,

6
thus they have an even greater incentive to provide buyers with good information and

good service. The status of a power seller is a strong signal to buyers that the sellers have

a good reputation and should lead to high final bid prices of auctions.

SHIPPING PRICE

The shipping price of an auction is easily observable on auction homepage just

below the current bid price. The amount charged for shipping is left up to the seller. The

following is eBay’s policy on shipping and handleing fees:

“Sellers may charge reasonable shipping and handling fees to cover the costs for mailing, packaging, and
handling the items they are selling. While eBay will not prescribe exactly what a seller may or may not
charge, eBay will rely on member reports and its own discretion to determine whether or not a seller’s
shipping, handling, packaging, and/or insurance charges are excessive”
(http://pages.ebay.com/help/policies/listing-shipping.html).

This leads to wide variations in shipping prices for homogenous goods and factors

into the value of the service of the eBay auction. Since, the shipping price is clearly

spelled out you’d expect buyers to simply add it to their bid price when calculating the

total cost of the auction. This should be the relevant cost for bidders to consider when

making the decision to bid. As theory suggests though, in items where the shipping cost

is a small fraction of the total cost buyers will not take a $1 increase in the shipping price

and add it into a $1 increase in the total cost of the item. When shipping is a small

fraction of the total cost of the item, buyers consider it as an add-on cost much like a tip

on a restaurant bill. Like the bidders, the restaurant goers don’t consider the total cost of

the meal, which is the sum of the tip and meal bill, when making their dining decisions.

They undervalue the cost of the tip in terms of its addition to the total cost of the meal.

Equivalently, a $1 increase in the shipping cost, where the shipping cost is a small

fraction of the total value of the item, will not lead to an equivalent $1 decrease in the

value of the service. Holding the monetary value of the good constant, due to an IPod

7
being a homogenous product, the aggregate eBay product value will decrease by less than

$1. It is important to note though, that in items where the shipping price is a large

fraction of the total cost or total value of the item buyers consider it more in their

decision making. In these cases a $1 increase in shipping price causes the buyer to

decrease the aggregate value of the eBay auction by the full $1.

BUY-IT-NOW

Buy-it-now is a selling option available to sellers. It allows a seller to set a fixed

buy-it-now price for potential buyers that results in the immediate completion of the

auction if the seller accepts the price. It differs from a standard auction in which the

seller choose a duration of 1, 3, 5, 7, or 10 days and potential buyers may submit bids

from the listing of the auction throughout the duration of the auction period. With buy-it-

now the seller sets the price and if a buyer accepts the auction ends immediately. The

theory underlying the decision to use buy-it-now in eBay auctions center on risk-aversion

and impatience as well as other transactions costs from both the buyer and sellers side. A

risk-averse seller has a distaste for volatility and uncertainty of the final bid price

associated with a standard auction. The seller is willing to trade-off the risk of

uncertainty for a lower return in the form of a certain buy-it-now price. As Matthews and

Katzman point out, the buy-it-now price produces higher expected utility for the seller

even though it may result in an inefficient allocation of the item. Buyers and seller have

an opportunity cost associated with their time in both the search for the item and the time

they wait to receive the item as the buyer or send it as the seller. In setting the buy-it-

now price the seller balances their opportunity cost of time associated with waiting for

the completion of the auction with the potential revenue lost from the auction not running

8
for its full duration. As the seller’s opportunity cost of time increases the buy-it-now

price set decreases as the seller is willing to trade-off lower potential revenues with the

lower opportunity cost of their. From the bidder side, if they have a strong taste for

having the item in the current period they will prefer buy-it-now over a standard auction.

An IPod is a type of item that people buy on impulse. In an impulse buy bidders have a

high opportunity cost of time and have a greater willingness to buy the item in the current

period versus wait for future periods. The value of the services is then an increasingly

negative function of a buyer’s opportunity cost of time. Thus, buy-it-now is an auction

feature that eliminates the opportunity cost of time and maximizes the value of the

service and the aggregate value of the eBay item being sold.

TOTAL NUMBER OF BIDS AND OPENING BID PRICE

Bidding is what drives an auction and eBay auctions are no different. On eBay

the seller sets the minimum bid and based on the minimum bid price eBay assigns

bidding increments. When someone wants to bid on an item they enter their maximum

willingness to pay at the given time. This does not have to be the in the given increment,

it can be any amount the bidder chooses. For example: if the opening bid is $1 and the

bidder decides at this time they are willing to pay $100 they can enter a bid of $100.

Ebay will show that the current maximum bid is $1 until another bidder joins the auction.

If another bidder comes along they see the current bid is at $1. He decides he’s willing to

pay $50 for the item. He enters the bid and eBay comes back and says you’ve been

outbid and pushes the bid to $51. In this way eBay is acting as a proxy bidder for the

first bidder and will continued to bid up for him until bidding passes the $100 bid that he

entered.

9
 The total number of bids should have positive impact on the final bid price. The

theory behind this claim is that as the number of bidders increase, these potential buyers

get into a bidding war. This leads these buyers to make impulsive decisions and in the

heat of the bidding war it drives up the final bid price.

According to theory the effect of the opening bid price on the final bid price is

ambiguous. Intuition would suggest that a lower opening bid price should generate

increased attention for your auction, especially when many homogenous goods are being

offered for sale. The increased interest should result in increased bidding and as

explained above the increased bidding results in a higher final bid price. A lower

opening bid price may also cause a lower final bid price as potential buyers may use the

opening bid price as a measurement of the value of your particular auction. The potential

bidders see the low opening bid price and it causes them to undervalue the item as they

see the low start price and are less willing to pay a price far above this low opening price.

In the literature this is a psychological phenomenon known as the anchoring theory. This

implies that the low opening bid prices serve as an anchor that effectively hold the final

bid price down. Again, the aggregate effect of these two counteracting effects is

uncertain.

END DAY OF THE WEEK

Ebay users are constrained in their usage of time, just like anyone else, as there is

only so much time in a day and only some many days in the week. These time

constraints drive the underlying decision making to purchase an item on the side of the

buyer. As leisure time increases you’d expect the time buyers spend on eBay to also

increase. The peak traffic on eBay should then be on the weekends and as the traffic on

10
the website increases there is a greater customer base, a greater demand for items, and

this should lead to a higher final bid price. According to Hsiao in his about.com guide to

maximizing your auction bids by timing, he says that Sunday brings the peak amount of

visitors to the eBay website

(http://ebay.about.com/od/sellingeffectivel1/a/se_timing.htm). Auctions that end on the

weekend should, therefore higher final bid prices than those ending on week days.

CONTROL VARIABLES

SHRINKWRAP: Online auctions create the opportunity for fraud and misleading

representations of items by the seller. For the IPod the bidder can only be sure it is brand

new if it is still in its original retail shrink wrap. Sellers can convey this information to

buyers by showing pictures of the item in the shrink wrap or by stating that it is shrink

wrapped in the item description. The fact that the IPod is still in the original packaging

sends the signal to the buyer that the IPod is not a lemon, a store return, or a damaged

unit. This is an unambiguous signal that allows both the buyer and seller to have

symmetric information about the IPod.

REFURBISHED: An IPod being refurbished sends the signal to the potential

buyer that it is not of the same high quality as a brand new factory sealed IPod. It’s likely

that the IPod was returned and was damaged or misused. People would rather buy an

untainted IPod, so they are willing to pay more for brand new factory sealed retail IPods,

and less for refurbished IPods. Being refurbished decreases the monetary value of the

IPod and thus the aggregate value of the IPod decreases as well. This causes the final bid

price to decrease.

11
III. Literature Review

eBay was founded in 1995 and has grown to a significant marketplace over its

short lifetime. Because the business is at the beginning of its life and has evolved a great

deal since 1995, when Pierre Omidyar originally launched the website, economic

literature examining eBay is also still emerging.

SELLER REPUTATION: The literature offers mixed results on the effects of

feedback on final bid prices. In their study on the determinants of price of coins on eBay

Lucking-Reiley et. al (2006) found that the coefficient to the seller’s numerical feedback

rating was not statistically significant in any specification of their models (p. 9). Wan

and Teo (2001) also examines the determinates of the price of coins on eBay. The

authors find that the coefficient to the seller’s numerical feedback is significant in one of

their four specifications and in that particular specification the coefficient is negative

which goes against the theory as the authors point out (p. 906). Bajari and Hortacsu

(2003) also examine coins and find that the overall seller reputation has a positive and

statistically significant effect on the final bid price (p. 336). The inconsistency in the

literature leads to the question: is there a better measure of seller reputation that can be

used to determine final bid price? A consistent conclusion drawn from the literature is

that negative feedback is a better measure of seller reputation used to determine the final

bid price. Both Lucking-Reiley et. al as well as Bajari and Hortacsu find that the

coefficient to negative feedback is negative and statistically significant. This study will

consider seller feedback percent and whether or not the seller is power seller as the

measures for seller reputation.

12
 SHIPPING PRICE: Hossain and Morgan (2006) suggest, prospective buyers

often separate the bid prices and shipping price, thus systematically underestimate the

total cost. The buyer considers shipping as an add-on cost. The hypothesis that results

from this assertion is that in auctions for items where the shipping cost is only a small

fraction of the total cost, the buyer will underestimate the total cost due to the add on

effect of the shipping cost. In items where the shipping cost is a large fraction of the total

cost buyers will look at the shipping costs more carefully and factor it into their bidding

strategy, and thus bid lower prices. This study will investigate how the shipping price of

auctions for IPods figures into buyers final bid price.

Buy-it-now: Buy-it-now is an option available to sellers that allows them to offer

their item for immediate sale. On eBay, the buy-it-now option disappears once someone

bids on the item whereas Yahoo and Amazon offer permanent buy-it-now options. Buy-

it-now allows buyers to immediately purchase the item and not wait for the auction

duration to pass by before they know if they have won or lost the auction. In a standard

auction, buyers submit bids during the auction period and have to wait until the entire

duration of the auction has passed before they know if they have won or lost the auction.

There is a possibility that after all the waiting they still might be outbid in the last second

of the auction. The buy-it-now option eliminates the uncertainty of being outbid and

guarantees that the buyer wins the auction. Matthews and Katzman (2006) found that in

the second quarter of 2001, 35% of items on eBay were listed with the buy-it-now option

and in December 2001, 45% were listed with the buy-it-now option. Two of the theories

explaining the use of buy-it-now are presented in the Ockenfels et. al (2006) paper. The

authors find that risk aversion and impatience as well as other transaction costs from both

13
the buyer and seller side provide the underlying theory for the use of the buy-it-now

option.

Opening Bid and Number of Bids: Häubl and Popkowski Leszczyc (2003) do an

experiment selling postal stamps and find that as they increased the opening bid price the

final bid price they received in the auction increase. They find that this evidence supports

the anchoring theory in that a minimum bid serves a psychological anchor hold down

increases in bid prices. Bidders see the low price and psychological they cannot bring

themselves to increase the bid too far above the anchor. Lucking-Reiley et al find that as

the minimum bid price increases the final bid price also increases and they also support

the anchoring theory suggesting that a minimum bid serves as a point of reference for

bidders who enter the auction. Wan and Teo also found that the minimum bid had a

positive and statistically significant effect on the final bid price. In Bajari and Hortacsu

(2003) the number of bidders is found as a positive determinant of final bid price.

IV. Model

The three primary auction characteristics that this study will focus on is the effect

of seller reputation, shipping price, and buy-it-now on the final auction price for brand

new 30GB IPods. To isolate these effects the model must control for other factors that

independently affect the final bid price. The following is the general model:

FINAL BID PRICE= f(AUCTIONPAGEVIEWS, SHRINKWRAP, REFURBISHED,

CARCHARGER, ENDSUNDAY, TOTALBIDS, OPENINGBID,
SELLERREPUTATION, SHIPPINGPRICE, BUYITNOW)

FINAL BID PRICE= the dependent variable. It is the dollar amount of the final bid
price.
AUCTIONPAGEVIEWS= number of times the item’s eBay auction page was viewed.

14
SHRINKWRAP= a dummy variable equal to 1 if the seller refers to in the description or
shows in an actual photo of the item that the IPod is still in it’s original
box and shrink wrapped or 0 if it isn’t.
REFURBISHED= a dummy variable equal to 1 if the IPod is refurbished or 0 if it isn’t.
CARCHARGER= a dummy variable equal to 1 if a car charger is included in the final
bid price of the auction and 0 one is not.
U2EDITION= a dummy variable equal to 1 if the IPod is a special edition U2 version and
zero if isn’t.
ENDSUNDAY= a dummy variable equal to 1 if the auction ends on Sunday or zero if it
ends on any other day of the week.
TOTALBIDS= total number of bids placed on the auction.
OPENINGBID= the opening bid price of the auction.
SELLERREPUTATION= this will be considered using 3 different measures. The
numerical and percentage feedback ratings will be unique
variables and a dummy variable equal to 1 if the seller is a
power seller and zero if the seller isn’t also will be included.
SHIPPINGPRICE= the dollar price of shipping for the item.
BUYITNOW= a dummy variable equal to 1 if the IPod was sold using buy-it-now or
zero if it isn’t.

The FINAL BID PRICE is the dependent variable and its variation for IPods is

the driving force behind this study. This model sets out to explain the dollar effect of the

auction factors on the final bid price. The control variables are:

AUCTIONPAGEVIEWS, SHRINKWRAP, REFURBISHED, CARCHARGER, and

U2EDITION. AUCTIONPAGEVIEWS attempts to control for possible mistakes in

listing the auction possibly by the incorrect spelling in the title or placing the auction in

the wrong selling category (i.e. putting it in the sports memorabilia rather than the

consumer electronic category). All these factors should lead to decreased traffic to your

auction page and thus a lower final bid price. As auction page views increase, ceteris

paribus, the final bid price will increase. The remaining four control variables control for

the differing monetary value of the IPod being sold. Recall the equation presented in the

theory section that the aggregate value of the IPod auction is the sum of the monetary

value of the IPod and the value of the service these four control variables effect the

15
monetary value of the IPod. Being shrink wrapped increases the monetary value versus

IPods that aren’t shrink wrapped as it is an unambiguous signal that the IPod that you are

bidding on is certainly the factory sealed retail IPod. Being shrink wrapped will increase

the final bid price of the IPod, ceteris paribus. Being refurbished has the opposite effect

on the final bid price as consumers are buying an IPod that was previously misused or

defective. Being refurbished will decrease the final bid price of the IPod, ceteris paribus.

The car charger is an extra that is included in the auctions to help entice potential buyers

to bid on the seller’s IPod. The price of various car chargers from the apple store on

apple.com is around $20. With this in mind, including a car charger in your auction with

the IPod should increase the final bid price, ceteris paribus. The final control variable is

whether or not the IPod offered for sale is a U2 Edition IPod. The price of the 30GB U2

Edition IPod on apple.com is $279.00 which is $30 more than the standard 30GB IPod at

$249.00. The U2 Edition IPod has the distinctive red and black U2 colors and has laser

engraved signatures of all four U2 band members on the back of the IPod. Thus, a U2

Edition IPod should increase the final bid price of the IPod in the model, ceteris paribus.

The effect of total bids on the final bid price is expected to be positive as more

bidders lead to a bidding war between potential buyers heating up and this leads to

impulsive decision making. The result is that the final bid price should increase, ceteris

paribus. The effect of the opening bid price on the final bid price is uncertain. As stated

in the theory section and literature review, there are both positive and negative effects of

the opening bid price on the final bid price. Setting a lower opening bid price may serve

to attract more potential buyers and create the bidding war described above by increasing

the number of bidders and resulting in a greater final bid price. Setting a lower opening

16
bid price may also serve to hold the final bid price down. Potential buyers figure the

opening bid price in when valuing the auction and end up undervaluing the aggregate

value of the eBay product when the opening bid price is set low relative to other

homogenous IPods. A psychological anchor is set that holds the final bid price low and

thus the excepted effect of the opening bid price on the final bid price is uncertain.

Seller reputation is expected to have a positive effect on the final bid price. As

seller reputation improves the final bid price should increase. In all different model

specifications using numerical, percent, and power seller variables all are expected to

have a positive effect on final bid price. The power seller variable is expected to have the

greatest effect as it sends the best signal to potential buyers that they are purchasing their

item from a professional eBay seller who has the greatest incentive to provide them with

high quality service. In the online community sellers value this quality assurance greatly

and should be willing to pay a premium for it. So, being a power seller is expected to

increase the final bid price by more than the other seller reputation variables, ceteris

paribus.

Shipping price is expected to have a negative effect on the final bid price, but a $1

increase in the shipping price is not expected to have an equivalent $1 decrease in the

final bid price, ceteris paribus. As stated in the theory and literature, when shipping is a

small percentage of the overall cost of an item potential buyers undervalue the cost of

shipping and thus for an IPod where shipping is a small fraction of the total cost of the

item, a $1 increase in the shipping price is not viewed as a full $1 increase in the total

cost of the item.

17
 If an IPod is sold using buy-it-now, ceteris paribus, it is expected to sell for a

greater price than if it is sold using a standard auction. This is because an IPod is

suggested to be an impulsive type of buy or a gift purchase. If this is the case then the

group of potential buyers that are purchasing the item will have a high opportunity cost of

time and are willing to pay a higher price in the current period to forgo waiting for the

auction duration to be completed. Also, if the buyers are purchasing the item as a gift

they may not be able to risk losing out on the auction in the last second so their risk

aversion causes them to highly value the buy-it-now option and pay more in terms of the

final bid price for it.

DATA SECTION
The mean final cost (mean final bid price + mean shipping price) of the new

shrink wrapped 30 GB IPods in the sample is $229.96. The cost of a new shrink wrapped

IPod from apple.com is $249 with free shipping. The difference is $19.04 and this can be

consider the opportunity cost for buying an IPod on eBay versus direct through apple or

other retail locations. The opportunity cost of purchasing an IPod on eBay is the cost

associated with the time it takes to search for the item. For people who are experienced

eBay users the search costs are lower so they have a lower opportunity cost of buying on

eBay. Using advanced search techniques allow buyers to get the right item at the right

price at the right time. Another opportunity cost is the time it takes to wait for the

auction to finish on eBay versus purchasing the item at a retail location. If a buyer has a

strong preference for getting the IPod as soon as possible, say because they want the IPod

for a cross country trip they are going on the next day, then their opportunity cost of

waiting for the auction to finish is very high. The buy-it-now option in the auction may

18
decrease this so called “waiting time cost”, but there is still the wait time associated with

getting the item shipped to you.

V. Research Methods

This paper examines 500 completed new 30 GB IPod auction from March 11 through

March 28, 2007. The specific search phrase used in finding the auction data on eBay was

“30 GB IPod New”. If you are registered eBay user, eBay allows you to access

completed auction data from the previous 30 days. Each auction was accessed

individually. The following variables were recorded: final bid price, shipping and

handling price, start day, start time, end day, end time, the duration of the auction in days,

the winning bidder’s numerical feedback score, the seller’s numerical feedback score, the

seller’s percentage feedback rating, whether the seller was identified as a power seller,

total number of bids on the item, total number of unique bids on the item, opening bid

price, auction page views, whether or not the seller accepted paypal money orders and

cashiers checks or personal checks, number of payment options (1,2 or 3), whether the

auction included a stock photo or an actual photo of the IPod, whether or not you could

concluded from the picture or description that the IPod was still in its original retail

shrink wrap, whether or not the Ipod was sold using the Buy-it-now feature, whether the

Ipod was white, black, or the U2 special edition version, whether the Ipod was

refurbished or not, and whether or not it came with extras like a case or car charger.

19
VI. Results

Model 1
Dependent Variable: FINAL BID PRICE
Variable Coefficient P-Value

AUCTIONPAGEVIEWS 0.0146 * 0.0597

SHRINKWRAP 10.996 *** 0.00

REFURBISHED -12.79 *** 0.0008

CARCHARGER 15.363 *** 0.00

U2EDITION 27.076 *** 0.00

ENDSUNDAY -4.479 ** 0.0258

TOTALBIDS 0.40484 *** 0.001

OPENINGBID 0.0547 *** 0.00

POWERSELLER 7.71 *** 0.00

BUYITNOW 5.087 *** 0.0063

N 389

R-squared .4193

* Significant at 10% level (two-sided)

** Significant at 5% level (two-sided)
*** Significant at 1% level (two-sided)

20
Model 2- Seller Feedback Percent
Dependent Variable: FINAL BID PRICE
Variable Coefficient P-Value

AUCTIONPAGEVIEWS 0.018 ** 0.0211

SHRINKWRAP 10.5594 *** 0.00

REFURBISHED -12.2077*** 0.0019

CARCHARGER 18.52 *** 0.00

U2EDITION 28.595 *** 0.00

ENDSUNDAY -3.816 * 0.067

TOTALBIDS 0.357 *** 0.0009

OPENINGBID 0.05136 *** 0.00

SELLERFEEDBACKPERCENT 0.1318 * 0.0726

BUYITNOW 6.081 *** 0.0016

N 389

R-squared .3729

* Significant at 10% level (two-sided)

** Significant at 5% level (two-sided)
*** Significant at 1% level (two-sided)

Model 3- Seller Feedback Number

Dependent Variable: FINAL BID PRICE
Variable Coefficient P-Value

AUCTIONPAGEVIEWS 0.0162 ** 0.05

SHRINKWRAP 10.577 *** 0.00

REFURBISHED -12.407 *** 0.0018

CARCHARGER 18.829 *** 0.00

21
U2EDITION 26.3188 *** 0.00

ENDSUNDAY -4.005 ** 0.05

TOTALBIDS 0.373 *** 0.0006

OPENINGBID 0.05228 *** 0.00

SELLERFEEDBACKNUMBER 0.000245 0.3341

BUYITNOW 6.1387 *** 0.0016

N 389

R-squared .3691

* Significant at 10% level (two-sided)

** Significant at 5% level (two-sided)
*** Significant at 1% level (two-sided)

SELLER REPUTATION
The focus of the goodness of people in the eBay community seems to materialize in

the feedback patterns of users, although these statistics are biased upward slightly

compared to the entire population due to an omitted variable bias. Users who have been

kicked off of eBay for having too many negative feedbacks are not included in the

sample. The mean seller feedback percent of the IPod data sample collected is 98.66%.

34.6% of sellers in the sample have a 100% feedback rating and 81% of the sample have

a feedback rating greater than or equal to 99%. The large percentage of sellers with

excellent feedback ratings is consistent with Calkins (2001) assertion that eBay as an

institution has created a feedback system which puts a very high cost on members who

give negative feedback. The direct cost is usually a retaliatory negative feedback from

the seller if you are the buyer or visa-versa if you are the seller. Another cost of negative

22
feedback for a user is possible harassment or personal attacks as retaliation for giving the

negative feedback. Since eBay is a public forum a user’s contact information is

accessible by the party retaliating allowing the user to attack this person directly, so this

further increases the cost of leaving negative feedback. The mean final bid price for

power sellers is $216.99 which is greater than the mean for non power sellers at $211.00.

When specifying seller reputation in the model, multicollinearity becomes a

concern because seller feedback measures and being a power seller should be correlated.

Examining the correlation coefficients between the three variables, the correlation

between power seller and seller feedback number is of concern at 0.347. It is possible to

include both PowerSeller and SellerFeedbackPercent or SellerFeedbackNumber and

SellerFeedbackPercent in the same regression, but I have chosen to examine each

individually. When SellerFeedbackNumber is included in the regression as the sole

measure of seller reputation, a one unit increase in numerical feedback rating for the

seller leads to a $0.000245 increase in the final bid price, ceteris paribus. The sign is

positive as theory suggests, but the result is not statistically significant as the p-value is

0.334. Next, including SellerFeedbackPercent in the regression as the sole measure of

seller reputation, a one percent increase in the seller’s feedback rating leads to a $0.1318

increase in the final bid price, ceteris paribus. This is significant at the 10% level with a

p-value of 0.0726. The percentage feedback rating takes into account the effect of

negative feedback on the final bid price. As empirical studies show, taking into account

the affect of negative feedback is a better predictor of final price. Buyers on eBay don’t

put a premium on the raw number of feedback a seller has, but buyers do penalize sellers

for having negative feedback or in this case lower feedback percentage ratings. Finally,

23
the powerseller dummy variable was included as the sole measure of seller reputation in

the regression. The powerseller variable takes into account both the numerical feedback

rating and the percent feedback rating along with criteria listed above in the descriptive

section on power sellers. A power seller’s IPod auction ended with a final bid price

$7.71 more than a non power seller, ceteris paribus. This result is statistically significant

at the 1% level with a p-value of 0.000. The difference in mean final cost for power

sellers and non power sellers is $231.47 – $222.68= $8.79. The model predicts that the

difference should be $7.71, but it holds all other factors constant isolating the effect

power sellers have on the final bid price.

Restricting the sample to just include power seller by setting the power seller

dummy variable equal to 1 allows the model to display the different effects on the

variables for power sellers versus the entire sample.

Model 4- SAMPLE RESTRICTED TO ONLY POWERSELLERS

Dependent Variable: FINAL BID PRICE
Variable Coefficient P-Value

AUCTIONPAGEVIEWS 0.0784 0.4261

SHRINKWRAP 12.797 *** 0.00

REFURBISHED -12.6438*** 0.0021

CARCHARGER 15.867 *** 0.00

U2EDITION 26.98 *** 0.00

ENDSUNDAY -4.519 * 0.0840

TOTALBIDS 0.2768 ** 0.05

OPENINGBID 0.0463 *** 0.0065

24
BUYITNOW 4.758 * 0.0667

N 214

R-squared .466

* Significant at 10% level (two-sided)

** Significant at 5% level (two-sided)
*** Significant at 1% level (two-sided)

AuctionPageViews is no longer statistically significant when the sample is restricted to

power sellers. Intuitively, this is in line with the above analysis on power sellers and

further supports the assertion that power seller is the best measure of seller reputation. If

buyers are confident in the credibility of the seller due to their power seller status the

amount times the auction page is viewed should have no effect on the final bid price. The

power seller denotation lessens the search cost for the buyers and increases their

willingness to bid. The p-value of auctionpageviews increases from .0597 to a p-value of

.4261. The coefficient value falls and though the variable is no longer statistically

significant the fall in the coefficient is consistent with the analysis that fewer page views

are need to increase bid price because of the power seller status.

If power sellers as a group can use their seller reputation to get a higher final bid

price and buyers are more confident in the power seller’s credibility the next question is:

are there any observable differences in the buyers who use power sellers as opposed to

the buyers who use non power sellers? Breaking the sample up into power sellers and

non power sellers the average numerical bidder feedback for IPods from power sellers is

70.05 and the average numerical bidder feedback for IPods that aren’t from power sellers

is 86.09. The average bidder feedback for the entire sample is 77.74. The level of bidder

feedback is a measure for experience with eBay. When you complete a transaction on

eBay the other party in the transaction leaves you a feedback. Feedback increases as you

25
complete additional eBay transactions. Buyers who buy IPods from power sellers have

lower feedback, on average than buyers who buy IPods from non power sellers. More

experienced buyers have lower search costs in seeking out better prices. Also, less

experienced buyers place a higher value on minimizing fraudulent transactions. Less

experienced buyers may be skeptical of eBay and electronic transactions, therefore they

place a higher value on the certainty the power seller designation gives the buyer.

SHIPPING PRICE

In the case of the IPod data collected the mean final bid price is $214.05 and the mean

shipping and handling price is $13.11 for an average total price of $227.16. Shipping is

therefore 5.77% of the total price which is a relatively small percentage of the total cost

of the item. Based on the theory suggested by Houssain and Morgan as shipping and

handling cost increases by $1, ceteris paribus, the final auction price should decrease, but

by less than one dollar. In Model I a $1 increase in the shipping price causes a $0.80

decrease in final bid price, ceteris paribus. This result is statistically significant at the 1%

level.

If buyers don’t consider the full cost and consider shipping as an add-on cost,

even though it is clearly stated, there is an inefficiency in the market and sellers can

exploit this inefficiency to maximize their auction profits. A logical question from this

discovery is: are sellers currently systematically exploiting this market inefficiency?

Consider power sellers discussed in the previous section. Power sellers are a group of

sellers whose status denotes them as eBay professionals. As a group they use their seller

reputation to receive final bid prices that are statistically significantly larger than non

26
power sellers. Through their experience and position as professional sellers exploiting

the market inefficiency in sellers under valuing a marginal dollar of shipping cost seems

plausible. When examining the mean values of shipping prices power sellers charge

$14.48 as compared to non power sellers who charge $11.68 on average. On average

power sellers charge more for shipping and at the same time on average they receive

more for final bid $216.99 versus $211.00. The total mean cost (final auction price +

shipping price) for power sellers is $231.47 and $222.68 for non-power sellers.

Performing the restricted regression in the previous section, on power sellers supports the

claim that power sellers do in fact exploit the market undervaluation of shipping price.

For the entire sample a $1 increase in shipping price cause a $0.80 decrease in the final

bid price. For the restricted sample of power sellers a $1 increase in the shipping price

causes a $0.71 decrease in the final bid price. The coefficient on shipping price in the

restricted model is statistically significant at the 1% level with a p-value of .0002.

BUY-IT-NOW

The theory underlying the decision to use buy-it-now in eBay auctions center on

risk-aversion and impatience as well as other transactions costs from both the buyer and

sellers side. A risk-averse seller has a distaste for volatility and uncertainty of the final

bid price associated with a standard auction. The seller is willing to trade-off the risk of

uncertainty for a lower return in the form of a certain buy-it-now price. As Matthews and

Katzman point out, the buy-it-now price produces higher expected utility for the seller

even though it may result in an inefficient allocation of the item. Buyers and seller have

an opportunity cost associated with their time in both the search for the item and the time

27
they wait to receive the item as the buyer or send it as the seller. From the bidder side, if

they have a strong taste for having the item in the current period they will prefer buy-it-

now over a standard auction. An IPod is a type of item that people buy on impulse. If

IPod buyers are in fact impulsive then they will be impatient with the bid process and

prefer auctions with buy-it-now. 25.4% of the IPods sold in the sample were sold using

buy-it-now and 74.6% were sold using standard auctions. Because that data was gathered

after the auctions were completed you cannot tell what percent of the auctions offered the

temporary buy-it-now because they were bid on.

To test empirically to see if a premium is paid for, we can examine the data

gathered in this IPod study. The first result is that the mean final bid price of IPods

bought using buy-it-now is greater than those bought using standard auctions: $222.43

versus $211.20. Looking at the regression, if an item is sold using buy-it-now, ceteris

paribus, the auction will get $5.09 greater final bid price than if the item is sold in a

standard eBay auction. This result is statistically significant at the 1% level with a p-

value of 0.0063. The $5.09 that buyers are willing to pay is the premium associated with

the impatience of the bidder. The fact that the difference in the mean difference between

IPods sold with buy-it-now and those sold without buy-it-now is $11.23 and the

difference holding all else constant is only $5.09. This leads me to believe that seller

reputation comes into play when offering buy-it-now meaning that power sellers are more

likely to offer buy-it-now than non power seller. The restricted sample is more

concentrated with power sellers than the entire 63.77% versus 50.80%. As a seller the

cost of buy-it-now, as listed on eBay’s website, is $0.25 additional for items selling over

28
$50. As a seller this small additional cost is far exceeded by the $5.09 benefit, so it is

logical to include a buy-it-now option when selling an IPod in order to maximize profits.

Total Bid and Opening Bid

The anchoring hypothesis is supported by the regression results as a $1 increase in

opening bid price leads to a $.055 increase in final bid price, ceteris paribus. This result

is statistically significant with a p-value of .0000.

The idea of bidding wars also is supported by the regression results. As an

auction goes on prospective buyers get caught in the excitement associated with the

auction. Considering total bids captures this excitement factor, though it is slightly

biased upward due to the proxy bid structure that eBay has, described above. Total bids

capture repeat bids by the same bidders. A one total bid increase, ceteris paribus, causes

a $0.404 increase in the final bid price. This result is statistically significant at the 1%

level with a p-value of .0001.

End Day of the Week

The result on the Sunday dummy variable is interesting as it implies that IPod

auctions that end on Sunday will sell for $4.48 less than IPod auction that end on any

other day of the week. This result is statistically significant at 5% level and the negative

effect on the final bid price of ending the IPod auction on Sunday is consistent

throughout all specifications on the model. Though theory suggests that the weekend

should yield higher traffic and higher bid prices this does not seem to be the case for

IPods. Since an IPod is an impulse buy it may be that people don’t need to wait for the

weekend to use their leisure time. With their high opportunity cost associated with

29
waiting to purchase an IPod they are willing to go on eBay during the week and purchase

the IPods often using the buy-it-now option which further supports this claim.

Control Variables

The price of a factory sealed IPod is $249, with free shipping, from Apple.com.

75.6% of the 500 auctions observed were for IPods in their original factory sealed shrink

wrap. The average total price (final bid price + shipping price) of these shrink wrapped

IPods is $229.96. The average total price of the IPods that are not factory sealed is

$218.41. In Model I an IPod that is shrink wrapped will sell for $10.99 more than an

IPod that is not shrink wrapped, ceteris paribus. This result is significant at the 1% level.

The U2 Edition and the inclusion of a car charger in the auction are both control

variables in the regression. The U2 Edition IPod has a final auction price $27.08 greater

than the standard black or white 30GB IPod, ceteris paribus. Including a car charger in

the auction causes the final bid price to be $15.36 greater than if it was not included,

ceteris paribus. Refurbished is another control variable and IPods that are refurbished

have a price $12.79 lower than non refurbished IPods, ceteris paribus.

The final bid price of a refurbished IPod is $12.79 less than an IPod that hasn’t

been refurbished. This result is statistically significant at the 1% level and is consistent

with the theory that the monetary value of the refurbished IPod decreases the final bid

price. The inclusion of a car charger also has the expected effect increasing the final bid

price by $15.36. Again the retail value of car chargers on apple.com is $20 so this result

is slightly below the retail price.

30
VII. Conclusions

In conclusions the factors having the most direct effect on final bid price are

shipping price, the seller reputation measured in terms of being a power seller, and the

use of buy-it-now. If sellers meet the criteria for being power seller they should sign up

with eBay immediately because they will increase their revenue. In the case of the IPods,

they will increase their revenue per IPod by $7.71 holding all else constant. As a seller

you also should charge a high fixed shipping price because buyers do not consider a $1

increase in the shipping price as a $1 increase in the total cost of the auction. Bidders

consider shipping an add-on price, much like a tip at a restaurant. Specifically, a $1

increase in the shipping price leads to a $0.80 decrease in the final bid price, ceteris

paribus. Power sellers should increase their shipping price by even more to increase

revenues as a $1 increase in their shipping prices leads to a $0.71 decrease in the final bid

price of the auction. Offering buy-it-now is the final piece in the puzzle for a seller trying

to maximize their profits selling new 30GB IPods. The seller should look at other buy-it-

now prices and in this case the seller should consider the mean buy-it-now price of

$222.43 and set their buy-it-now at or close to this price. By setting this price impatient

buyers who are willing to pay a premium to get the item faster will buy. To the degree

the seller is risk-averse they should decrease the buy-it-now price relative to the mean. In

this way the seller is placing a premium on minimizing the volatility in final bid prices.

These conclusions add to the literature currently available and for the most part are in line

with results from previous studies. An application of this model to another data set may

be instructive in the future and a test of these findings may further solidify the results as

support for eBay auction theory.

31
References

Bajari, P. and Horacsu, A. “The Winner’s Curse, Reserve Prices, and Endoenous
Entry: Empirical Insights from eBay Auctions.” RAND Journal of
Economics, Vol. 34, No. 2, (Summer 2003), pp. 329-355.

Calkins, Mary M., “My Reputation Always Had More Fun Than Me: The Failure of
eBay's Feedback Model to Effectively Prevent Online Auction Fraud.” 7 RICH.
J.L. & TECH. 33 (Spring 2001),
http://law.richmond.edu/jolt/v7i4/note1.html#h4b

Hsiao, Aron. "Maximize Bids by Timing Your Listings." About.Com. 1 Apr. 2007
http://ebay.about.com/od/sellingeffectivel1/a/se_timing.htm

Katzman, B. and T. Matthews (2006). The Role of Varying Risk Attitudes in an Auction
with a Buyout Option. Economic Theory 27. 597-613

Lucking-Reiley, Bryan, Prasad, and Reeves. “Pennies from eBay: the

Determinants of Price in Online Auctions.” Working paper, University of
Michigan & University of Arizona, May 2006.

Wen Wan and Hock-Hai Teo. “An Examination of Auction Price Determinants
on eBay.” School of Computing, National University of Singapore. The
paper was presented at the 9th European conference on Information
Systems in Bled, Slovenia, June 27-29, 2001.

www.ebay.com

32