A big thank you to one of the great product managers at eBay, Rebecca Nathenson, for forwarding me this German study on eBay economics. (I would link to her blog, but she is hiding it from me…)

The Effect of Reputation on Selling Prices in Auctions (PDF)
by Oliver Gürtler & Christian Grund

As I mentioned in my previous post about starting prices, I have a strong interest in academic studies on the economics of eBay, the largest online marketplace globally. I am convinced that our level of understanding of the economics of marketplaces like eBay are still in their infancy.

As someone who has been selling on eBay since 1998, this study covers three topics that are easily familiar: reputation, shipping prices, and ending times. The study is from May 2006, and it is based on the eBay Germany site, but their is no reason to believe that they are country specific.

The first piece of the study looks at the effect of feedback on final selling prices on eBay. They confirm the obvious – reputation does impact final selling price positively. What’s interesting here is that it seems that the overall number of negatives did not have a measurable effect on final selling price. However, the percentage of negatives did. This result verifies anecdotal experience from many eBay buyers and sellers who will tell you that the “percent positive” is their primary measure of eBay reputation, once feedback scores rise beyond an initial threshold.

The second interesting tidbit from this study is their study of shipping prices. Once again, it confirms the obvious – higher shipping prices lower final sale prices. However, the interesting tidbit here is the fact that one dollar of increased shipping led to less than one dollar in reduced final sales price. This means that sellers may be better off charging a fair cost for shipping & handling, rather than assuming that if they offer low shipping that the cost will be made up in the auction price.

When I first started selling computer components in bulk, I experimented with different combinations of price and shipping cost. In one experiment, I took the exact same listing & description, and set different prices for the item & shipping, but left the total the same. They ranged from $15.99 with free shipping all the way to $0.99 with $15 shipping.

The result – the best selling item, measured in page views and conversion rate, was the $9.99 price with $6.00 shipping.

My theory at the time was that two human factors were occurring here. First, people see exorbitant shipping as dishonest. As a result, the listings with ultra high shipping looked dishonest, and it resulted in a lower purchase rate. At the same time, although buyers love free shipping, they were confronted with sticker shock from the high $15.99 price. Clearly, gas stations know what they are doing when they price gasoline to the 9/10 of a cent.

In their words:

The results with respect to the other variables indicate that postage affects sales revenue negatively, which was expected. However, an increase of postage in the amount of 1 € does decrease the price only by the amount of 5 per cent on average, which means by about 60 Cent at an averaged price of 12 €… In our case, however, it seems to be beneficial for sellers to segregate the total revenue into the two dimensions postage and selling price, because potential buyers concentrate on the main price during auctions and neglect the amount of the postage.

The last interesting insight from this research is their investigation of the effect of duration and ending time on the final selling price.  Interestingly, there is a surprise here, which they dub the eBay Evening Fallacy.  They claim that auctions that end in the evening perform worse than auctions that end earlier.  As an interesting side note, they also found no evidence that duration impacts the final selling price.

What’s interesting about this insight is that it doesn’t really explain why this fallacy exists.  One possibility is that historically, evening ending times did perform better than earlier times.  However, as this became known, supply overwhelmed demand as everyone piled onto the same popular times.

I think actually this is a nice place to end this review, because in the end, while fascinating, the last insight is a warning.  eBay is a dynamic marketplace, and as information flows through the market, the profitability of different strategies may change over time.  Everyone knows they vary by country, by category, and by season.  They also can vary based on what everyone else is doing.

In finance, there is a theory of efficient markets that posits that public information flows nearly instantaneously through the stock market.  As a result, all returns are merely compensation for risk. Part of the attraction of private equity is the fact that it operates in a world, by definition, of more limited information and more limited access.  That’s what yields those wonderful returns that Venture Capital has seen over time.

It’s interesting to think of eBay in that light.  Strategies are always evolving, as information is communicated about how to succeed on eBay.   Are proprietary access to inventory, or proprietary strategies the keys to outperformance?  Efficient market theory has a risk-free return built into its model.  Does eBay have the equivalent of a risk-free return, and if so, what is it?

That’s why I love research like this.  It goes beyond the anecdotal and makes you think.