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.

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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

Adam D. Galinsky

Member of the Department of Management & Organizations faculty until 2012

J. Keith Murnighan

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

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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