Surprise: Auction Bidders Not Always Rational

from the zoon-economicon dept

In an attempt to gain a better understanding of human economic behavior, a group of economists studied the buying patterns of eBay auctions. What they found was that humans are not always rational, at least in the econ 101 sense of the word. One of their most surprising realizations was that bidders would often pay a higher price than the “Buy it Now” price, presumably because they got so caught up in the heat of the auction. This is an odd quirk, though its discovery was hardly needed to demonstrate that humans don’t always operate in a purely rational manner. Another thing they discovered was that bidders didn’t pay much attention to shipping prices, and that they’ll typically opt for an item that can be won for less, even when shipping costs eat up any savings. Ultimately, there’s more to auctions than simple price discovery. Not only are they successful because they help arrive at an equilibrium price for goods, but participation in them makes for a fun, game-like experience. Thus, it shouldn’t be a surprise that those involved aren’t always shining examples of homo economicus.

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Companies: ebay

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Comments on “Surprise: Auction Bidders Not Always Rational”

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name says:

Re: Re: Re: Re:

of course! Anonymous Coward always has interesting things to say. Thats the reason why i read anything on techdirt. Never points out the flaws in anything and is always kind to his fellow man!


moron (Anonymous Coward)

im sure u’ll take a few minutes out of your pointless life to comment back, as always. I can’t wait!!! perhaps you should find a new hobby.

SPR (profile) says:

All joking aside, I have made two purchases on E-Bay and was satisfied with the results. I bid on a third item and was an unsuccessful bidder. When the auction ended I was suddenly hit with a slew of emails offering the same item for my bid. Of course, they ALL turned out to be scam artists trying to trick me into paying them for an item they did not have. I offered two items for sale on E-Bay and was underwhelmed with the results (no sale). I don’t waste my time on E-Bay anymore as a potential buyer OR seller.

ReallyEvilCanine (profile) says:

There's another explanation: game theory

I disagree that buyers are acting irrationally. Some do, primarily those who see bidding as a game for items which have less economic meaning, but with the novelty of on-line auctions a thing of the past, this isn’t as common as it once was.

An item has a value of Y to a particular buyer. If the “Buy It Now” price is less than Y but the buyer believes the final bidding price will be even lower, he therefore bids rather than taking the fixed price offer. This is a rational price floor-seeking behaviour.

Those who use “Buy It Now” consider the risk of the bid price exceeding the “Buy It Now” to be higher than the value of the risk of losing the item to someone who places a higher value Y on the item.

For certain items there’s a limited but highly competitive market. An example of this is the market for pinball machine parts. Since almost none are manufactured anymore there’s a serious scarcity in the market and a high demand among both those who need a part (such as a particular electronic board) and those who buy with the expectation of needing the part some time in the future. These people further compete with speculators who buy only to resell.

Using this example, if a “WPC 95 CPU board” comes up for $X, most buyers will be motivated to use “Buy It Now” because of the knowledge of the scarcity, but the speculator will often force the bidding process in order to see how high the price will be driven, not making the highest bid but gathering pricing information for the future, at which time he’s also willing to “Buy It Now” in order to then sell it at the market clearing price that the bids demonstrate.

Another similarly acting market is professional camera lenses. The value is high but the competition limited to a limited group of buyers, again both those with an interest in purchasing the lenses and the opportunistic speculators. The auctions function similarly.

The biggest problem with these high-value, limited market auctions is that they’re ideal for scammers who offer low prices and no “Buy It Now”, forcing bidding which generally ends at the expected market-clearing price, which some sucker then pays and never sees again. They can profit further by writing to the non-winning bidders claiming the winner never replied and offering the item at that bidder’s last bid price. A non-existent $2,000 Canon lens can net a scammer more than $5,000 this way.

SBBrian says:

Ebay and the general public

No secret Ebay is full of (Nigerian) scammers. But still a great way to sell or buy an item and make a quick buck from all your junk. That is if you know how to use it and know what red flags to look for.

I read this article and laughed “Another analyst that thinks he can make sense of something he knows nothing about”. I’m sure this person has never sold of bought on Ebay, and just browsed the prices.

Most people who use Ebay are not as stupid as you may think. Some Ebayers consist of people trying to purchase items below retail, or sellers that have figured out that they can make more money on the quantity of items they sell rather than selling an item at retail and only selling a few items. They also figured out that they can make money on the backend in Shipping.

I will admit I have paid more in shipping than I should for and item. It’s not because I’m stupid, it’s because I consider the price of an item, shipping, and tax for the final price. For example and item selling for $90 and shipping for $10, or paying $50 for the item + $50 for shipping, and still having to pay tax on both items because the 2 business are located in same state I’m buying from. Hmm, According to the analyst I was caught in the heat of the moment and paid too much for shipping. Or I figured either way I look at it that I am paying $100 for the item that retails for $150. The way I look at it what would I much rather pay taxes on $90 or $50 since I’m not going to pay taxes on shipping.

Now who is the dumb a$$ the people paying full retail at a store or people saving gas and buying at wholesale on ebay.

Ted Baxter says:

Don't hate the player.........

The game aspect is what promotes the irrational behavior. It just like how microsoft has increased its search precentage with that stupid chicken game.

Each play of the chicken puzzle forces 35-50 searches on the MS engine.

Irrationality is not limited to consumers or “ebay morons”, Economists cited MS’s gains and the stock went up as Google (down 6 bucks today) and yahoo dropped.

Jenny says:

give the right choice

A website for business should always give their customers the quality service to make them believe they choose a right website to do their business. Never make light of them, or you will lose them. We are running a website at for both American and Chinese company. Our conclusion is take your customers’need as your priority. Try your best to serve them well, and you will be payed back.

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