Place Your Bids
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Economics Finance & Accounting Strategy Nov 1, 2007

Place Your Bids

Strategies for selling and buying in auctions

Based on the research of

Gillian Ku

Adam D. Galinsky

J. Keith Murnighan

Listening: Video interview with Adam Galinsky
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Common sense might make you cringe at a starting bid of a dollar in an auction for your mint-condition car or a penny for your never-worn designer suit. Conventional wisdom says that if you ask for a high price you should receive a high price. But this adage of “ask and you shall receive” might not always hold true. In online auctions such as eBay, you might even be selling yourself short by asking too much.

The traditional belief is that a high first offer results in a high selling price. This belief is rooted in a psychological principle known as anchoring, such that the size of an opening bid is a testament to the item’s value. The numerical value of an anchor sets the tone of more or less prestige of the product up for auction. Furthermore, a high opening bid can spark the rose-colored-glasses effect, leading bidders to focus on the more positive features of an item.

Recent research by Adam Galinsky and J. Keith Murnighan, professors in the Management and Organizations Department of the Kellogg School of Management, and Gillian Ku of London Business School turns tradition on end. In a paper published in the Journal of Personality and Social Psychology, the researchers show that low rather than high opening bids—for a variety of products from shirts to fancy rugs in online auctions—generate high selling prices, demonstrating a reversal of the anchoring effect.

High Traffic, High Prices
Using data collected in laboratory studies and through the eBay archives, the researchers performed a series of experiments to investigate the effect of low opening prices in generating high selling prices and the psychological forces involved in this reversal. In an experiment with MBA students, more participants said they would bid in an auction with a starting price of $1 compared to a starting price of $10. The same pattern held true when participants were asked to imagine bidding on a shirt with an opening price of $1 or $24.99, since the lower starting price spurred more traffic.

When the researchers compared two different starting prices—$9 .99 and $24.99—they found that the more time bidders sank into the auction the greater the final selling price.

However, would the increased flow of auction traffic actually lead to a higher selling price? Could it be that temptingly low starting prices increase the number of bidders and drive up the final price? The researchers scrutinized data from actual eBay auctions to see whether the same product offered at different opening bids would command different selling bids.

To allow the results to be generalized across goods, the researchers chose two different products—a Nikon camera and a Persian rug—to compare the relationship between the initial asking and the final selling prices. “Nikon cameras are plentiful, and people generally know how much they’re worth whereas the Persian rugs are one of a kind and hard to price,” Galinsky said. Data including the starting and ending prices and the numbers of bids and bidders were analyzed from auctions for 179 Tabriz Persian rugs and 87 Nikon digital cameras. For both products, the researchers found that a low starting price led to a higher final price. They also verified that lower starting prices led to more bids and more unique bidders, indicating that traffic contributed to escalating the final price.

The Power of Commitment
Probing in more depth, the researchers wondered what psychological factors contributed to the bidding fervor produced by low starting prices. Perhaps low starting prices engaged people and made them more committed, leading them to place more bids.

To test for this escalation of commitment, the researchers correlated the time invested in an auction with the final cost in eighty-nine online auctions for Tommy Bahama shirts, high-end Hawaiian-themed silk shirts for men that sell for about $100 retail.

“Economically you want to avoid high-traffic auctions, but psychologically you are lured by high traffic.” — Adam Galinsky

When the researchers compared two different starting prices—$9 .99 and $24.99—they found that the more time bidders sank into the auction the greater the final selling price. “Because you lower barriers to an auction, you get them to invest time and resources,” Galinsky said. “They get trapped.”

Following the Crowd
In addition to the time invested as a psychological factor promoting bidding, the researchers wondered whether high traffic attracted more bidders and increased the perceived value of the item. Just as you might be tempted to eat at a restaurant with a car-filled parking lot, perhaps online bidders are drawn to an auction with many bidders.

In an experiment involving an imaginary auction for a Cancun vacation, undergraduate participants indicated how much they thought the trip was worth after seeing an eBay-like page showing the number of bids and the current bid at the pretend auction. With the number of bids ranging from five to twenty-four and the current price ranging from under $900 to about $1,600, participants who saw more bids thought that the trip was worth more than participants who saw fewer bids. “People use the number of bidders to infer value. They think, ‘They must know something that I don’t,’” said Galinsky of this herd effect at auctions. “Economically you want to avoid high-traffic auctions, but psychologically you are lured by high traffic,” he added.

The strength of the study was the consistency of a low starting price leading to a high final price for all kinds of products. “It was true for three really different kinds of items,” said Murnighan of the shirt, camera, and rug. “For the phenomenon to occur with all three gives me a lot of confidence. Traffic is really the key.”

Strategies for Selling and Buying in Online Auctions
To further probe how the buzz at an auction boosts the final price, the researchers studied how decreased traffic for a desirable product affects the sale. “Once you understand a phenomenon, you should be able to turn it on and turn it off,” said Murnighan. Producing low traffic at an ordinarily well-trafficked auction is one way to turn off the phenomenon.

Misspellings of product names on eBay can decrease traffic by keeping potential bidders from finding the auction. Murnighan, an eBay user with a feedback score of 870 and an approval rating of 100 percent, said that misspellings of products are frequent on the Web site and are well known among aficionados such as himself. “You can find ‘Armoni’ instead of ‘Armani,’” he said as an example.

The researchers used data from 43 correctly spelled Michael Jordan and 33 incorrectly spelled Michael Jordan auctions for shirts to see how the starting and ending prices compared with the bid history. If high traffic is the key for auctions that start low and end high, then the pattern should not hold true in auctions with less traffic. That is, one should see a positive correlation between starting and ending prices for misspelled shirts, driven by decreased traffic.

That is exactly what the researchers found: the low traffic of incorrectly spelled auctions meant that low starting prices led to low ending prices. Accordingly, getting a bargain depends on finding a low-trafficked auction. Look for misspelled items, items with no photographs, or items with auction end times outside the bid-frenzied prime-time hours. “You want to find a market that is as narrow as possible,” Galinsky said. The reverse is true for sellers. “Sellers should create a market that is as wide as possible,” Galinsky said. “You start with a low price when you believe that there’s a substantial market for the item such that you lower the barriers for people to start bidding.”

Featured Faculty

Member of the Department of Management & Organizations faculty until 2012

Member of the Department of Management & Organizations from 1996 to 2016

About the Writer
Molly McElroy, is a freelance writer based in Somerville, Massachusetts.
About the Research

Ku, G., Galinsky, A. D., & Murnighan, J. K. (2006). Starting low but ending high: A reversal of the anchoring effect in auctions. Journal of Personality and Social Psychology, 90(6): 975-986.

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