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    Professors unlock key to eBay sales
    03.04.06 (7:25 pm)

    The next time you make an online purchase -- or online sale -- paying attention to the "plus shipping and handling" part of the transaction could save, cost or make you some extra bucks.

    That's the upshot of a study by two professors who looked at how people react to the prices and shipping costs for items they put on the block at the eBay auction site. It turns out, according to their research, that people are a lot more likely to notice the basic cost of an item than to check the shipping charges.

    The bottom line: Sellers can make more money if they charge a lower price for the item itself, but charge a bit more for the shipping fees, according to the study by UC Berkeley Haas School of Business professor John Morgan and Hong Kong University of Science and Technology assistant professor Tanjim Hossain.

    "Setting a low opening bid and a high shipping and handling cost yield systematically higher revenue than doing the reverse," Morgan and Hossain wrote.

    Why does this happen? Why don't people look at the entire price? The answers may lie in part in how people process financial costs involved in negotiations.

    "My preferred explanation is people keep separate mental accounts for different aspects of a purchase," Morgan said. "People keep a kind of mental account for the purchase itself and put that in one silo, and they keep a separate mental account for the shipping charges and put that in another silo."

    The professors conducted several auctions to compare what happened when the opening bid was low and shipping charges high to auctions when the bid was high and the shipping charges low.

    In three out of four experiments, a lower opening bid and higher shipping charge generated more revenue than when opening bids were high and shipping charges were low.

    For example, the professors auctioned 10 video games for the Xbox console. In one experiment -- where the opening bid was set at a relatively low level and the shipping charges at a relatively high level -- the average revenue for the auction was $41.06. That was 11 percent higher than the average revenue of $36.95 for instances with higher opening bids and lower shipping charges.

    In one instance, of selling music CDs, low item prices and high shipping costs produced 34 percent more revenue.

    But it doesn't always happen that way. In auctions of music CDs, which tend to cost quite a bit less than video games, it was difficult to get away with shipping charges that greatly exceeded the cost of the CD. When there was a real disparity, such as an opening bid of $2 and a shipping charge of $6, average revenues when the shipping charges were high fell 3 percent below the high-bid, low-shipping scenario.

    "When we jacked up the shipping charges to $6, a lot of people perceived us as being crooks," Morgan said.

    Morgan compares it to a $400 upgraded sound system that somebody might add to an automobile. People are more willing to pay that fee on top of the purchase of a $20,000 vehicle. But they would be more likely to balk if the $400 upgrade was in addition to an oil change.

    "It's a pretty natural thing to just focus on the price," said Jennifer Brown, an economist and graduate student with UC Berkeley's Department of Agriculture and Resource Economics. Brown co-wrote a separate study that found that an auction of identical coins produced 60 percent more bidders on the eBay site than on the Yahoo! auctions site, and 30 percent higher revenue.

    Matters have become more transparent on the eBay site. To help consumers, the company recently organized searches so shipping charges appear along with the item cost when the search results appear, said Catherine England, a spokeswoman for San Jose-based eBay Inc.

    "We also have a policy against excessive shipping charges," England said. "But that's a gray area. If we get complaints about excessive shipping fees, we would pull that item from the site."

    Ultimately, it's up to buyers to beware.

    "The lesson for consumers is clear," Morgan said. "You want to pay attention

    CONTRA COSTA TIMES

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