...Plus Shipping and Handling: Revenue (Non) Equivalence in Field Experiments on eBay

Tanjim Hossain, Hong Kong University of Science & Technology
John Morgan, University of California, Berkeley

Abstract

Many firms divide the price a consumer pays for a good into two pieces---the price for the item itself and the price for shipping and handling. With fully rational customers, the exact division between the two prices is irrelevant---only the total price matters. We test this hypothesis by selling matched pairs of CDs and Xbox games in a series of field experiments on eBay. In theory, the ending auction price should vary inversely with the shipping charge to leave the total price paid constant. Contrary to the theory, we find that charging a high shipping cost and starting the auction at a low opening price leads to higher numbers of bidders and higher revenues when the shipping charge is not excessive. We show that these results can be accounted for by boundedly rational bidding behavior such as loss-aversion with separate mental accounts for different attributes of the price or disregard for shipping costs.

Erratum

The equation for bidder i’s payment if she wins on page 5 should read P_i(r,o,s) = max_j≠i β_j(r,o,s) + s. Consequently, the subscript on β and γ in the proof of Proposition 1 should be j instead of i. These are typographical errors, and none of the results and conclusions of the paper are affected.