Are eBay Auctions Rational?

from the check-the-data dept

Tue, May 29th 2007 12:54pm — Mike Masnick

There's been a trend in the last few years to suggest that a new group of economists are somehow "disproving" the traditional "neoclassical" basis for economics: that of "the rational person." A recent article in The Nation is the latest in a long line of articles claiming that there's a growing group of economists going against the grain. The problem, however, is that almost every time you look at the details, they don't actually disprove the rational person. They simply point out that the rational person is rational based not just on data and dollars -- but on many other things, including social conventions and peer pressure. That is, when someone makes a "bad" decision in terms of dollars due to peer pressure, that doesn't mean the person is irrational -- it simply means at the instant of the decision they valued the approval of their peers more than the dollar value lost due to the decision. Slate is running an article asking whether or not eBay auctions are rational, looking at some research by an economist who has been studying online auctions for many years. It notes that classical auction theory would suggest that having a "secret" reserve price (the lowest price at which the seller will actually accept the bid) will do better than one where the reserve price is open, because it reinforces the idea that others are interested in the product as well and bidding will move upwards. However, the research showed the opposite. An open reserve price (so you can only start bidding at the reserve price) tends to get more interest. Of course, this doesn't actually answer the question of whether or not eBay auctions are rational. All it shows is that bidders value the certainty of knowing what the reserve price is, and do not value the uncertainty of a secret reserve price that could mean wasted effort in a particular auction. That's hardly irrational.

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21 Comments

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Rob (profile), 29 May 2007 @ 1:58pm

Rational or mob mentality
I'm not sure about rational or not, however from my personal experience selling the odd item here and there I've noticed the following trend. Items I've listed never sell with only 1 bidder. I've had almost every auction item go as follows:

Step 1: List item at lowest price you think you will accept.
Step 2: When auction ends relist the item about 15-20% cheaper but increase the shipping and handling fee.
Step 3: Auction ends about 25% above my initial listing price and with about 5 or 6 interested bidders.

Its as if no one wants to make the first move, but when someone does its like chumming the waters.

So I guess based on my decidedly non-scientific methods I would say that eBay auctions are definetly not rational.
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Sanguine Dream, 29 May 2007 @ 2:08pm

Of course its not rational
When you have

1. Sellers that will borderline lie items.

2. The fact that 60% of all items have **RARE!!** in the title. I've seen **RARE!!** copies of Final Fantasy 7 for the PSX. And mind you these copies didn't have any special attributes like still in the orginal shrink, an autograph, or something like that. Just a plain old used copy that has that yellow used price tag from EB Games. Overhype.

3.Real rational auctions end when someone makes a high bid and said bid is unchallenged for X amount of time, not whoever has the highest bid after X amount of time. There is a differnce.

and my personal favorite...

4. Bid sniping. I don't care how you cut it having an automated program that adds current high bid + $1 in the last 5 seconds of the aution is cheating.

Add all that together and I would agree that Ebay "auctions" are not rational.
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Quantum John (profile), 29 May 2007 @ 2:14pm

Rational article
Your article is quite rational, Mike. And that's quite a refreshing thing in this world...
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Anonymous Coward, 29 May 2007 @ 2:20pm

ebay buyers not rational
I've also seen WAY too many times, an item selling on eBay for 30% or more (not including the price of shipping/handling) above the price the same item can be purchased locally in a store.

Granted there are deals to be had on eBay, but it really defies all logic to see stuff sell way above current market prices at the local WalMart.
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lizard, 29 May 2007 @ 2:21pm

quick answer: "no"
from my (rather extensive) observations there are few auctions on eBay that proceed in an orderly and rational manner -- and the best way to get more money is to start with a lower minimum bid. if you take the chance of listing your item at the rational, reasonable amount you would minimally accept, your chance of 0 bids greatly increases. some of the highest bidding, feeding-frenzy type auctions i have ever seen started with a ridiculous $0.01 minimum bid and no reserve -- my theory is that opening bid price remains prominently in the listing, creating a much greater perception of getting a bargain, even though by the final bid the item has quite often sold for more than one would pay a fixed price vendor elsewhere.

on eBay, you have the crowd mentality in full force, and 'rational' rarely enters that picture.
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Petréa Mitchell, 29 May 2007 @ 2:44pm

Not in economic terms
In economics, "rational" means not taking social conventions or peer pressure into account.

On the other hand, the second article's message that new economics is in the process of overthrowing capitalism is baloney. Behavioral economics has opened up new and interesting windows, but it doesn't invalidate or support any specific type of economy-- it just shows that they're all a little more complicated than previously assumed.
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steve, 29 May 2007 @ 2:51pm

depends
depends on the auction. i but electronic parts. sure cant beat the deals there
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dink, 29 May 2007 @ 2:55pm

My favorite shirt reads...
"Never underestimate the power of stupid people in large groups."

Listing on ebay is an art, as it defies all logic; most of the time.
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TX CHL Instructor (profile), 29 May 2007 @ 3:07pm

Re: Of course its not rational
Bid sniping is the ONLY rational way to buy on ebay. All intelligence bidders will bid their max as late as possible in the course of the auction. Then the dumb ones will complain about getting "ripped off", when, in fact, no such thing happened. If you bid the maximum that you are willing to pay, then there are only two possible outcomes: 1) you win at a price less than or equal to what it was worth to you, or 2) you laugh at the fool who paid too much. If you lose, and you would have been willing to pay a little more, then you have nobody but yourself to blame.
--
Texas Concealed Handgun License Courses in Plano, TX
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Lawrence D'Oliveiro, 29 May 2007 @ 3:14pm

Rationality or not
I think you're stretching the definition of "rationality" a bit. The whole point of the economic game is to maximize monetary returns. Therefore if other players are playing less-than-optimal strategies because of social conventions or peer pressure, then they're not rational, and that's that.
And the fact remains, modern psychology is accumulating a mountain of evidence that, by this very simple definition, people are not rational.
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jeremy liew, 29 May 2007 @ 4:30pm

nothing of the sort
The Slate article you link to never asks if Ebay auctions are rational - rather it says that an academic faced with differing predictions from theory tested on Ebay and found that one theory was dominant. It sounds like good scientific method and very rational.
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Darrin Rogers, 29 May 2007 @ 4:31pm

confusion re: rational
I agree with Petrea. Economists' definition of the term "rational" is not the same as the commonsense understanding of it.

It's about time the "rational consumer" model got tweaked (and possibly thrown on its head). Kahneman & Tversky came up with Prospect Theory back in the 70s.
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Anonymous Coward, 29 May 2007 @ 9:49pm

Re: Re: Of course its not rational
If that is the case then why does the person using the bid sniping need to use a sniper in the first place? By your logic wouldn't the sniper have put in the max they are willing to pay and therefore not need an automated program to up the ante for them.
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David Wynn, 29 May 2007 @ 10:30pm

Economic Hole
I'm not so concerned with the notion of rationality. Instead, I'm intrigued by your statement that rational agents use data and not dollars. I think the statement is very accurate, but to my knowledge, economics (neoclassical or otherwise) has a really tough time dealing incorporating concepts like peer pressure into its models. Peer pressure doesn't translate into numbers too well, and neoclassical has shifted to a nearly purely mathematical discipline. I discussed some of the growing alternatives in a blog post I just wrote up, but isn't the exogenous nature of key variables like peer pressure enough to cast doubt over the economic discipline? Or if not the discipline, then at least the results of the models?
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Coises (profile), 30 May 2007 @ 12:42am

Advertising
Advertising is ubiquitous, yet very little of it is directed at presenting a rational appeal. To the extent consumers are swayed by advertising, they are not rational; to the extent they are not swayed, business is not rational in purchasing advertising.
Advertising is a 100-plus-billion dollar per year testament to the inapplicability of the theory of rational economic agents. I fail to understand why anyone still takes it seriously.
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Anonymous Coward, 30 May 2007 @ 1:23am

Re: ebay buyers not rational
In my case, there are not that many shops around so most times ebay is the only place to buy.
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fuse5k, 30 May 2007 @ 5:48am

rational, never...
Surely you have seen the images on the net with pictures of ebay auctions that the person got ripped off on.

The one that springs to mind here is the PS3, i remember seeing an auction for a picture of a PS3 at over $1000

obviously ebay is not rational when someone will pay that much for a picture.

Too many people on the internet are afraid of reading...
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Bubba, 30 May 2007 @ 5:57am

Reserve Prices: Ebay vs. Live auctions
" It notes that classical auction theory would suggest that having a "secret" reserve price (the lowest price at which the seller will actually accept the bid) will do better than one where the reserve price is open, because it reinforces the idea that others are interested in the product as well and bidding will move upwards. However, the research showed the opposite. An open reserve price (so you can only start bidding at the reserve price) tends to get more interest."

Ebay Auctions are different than live auctions - in live auctions, one thing is being auctioned at a time, so all attention is on that item. With online auctions, people aren't willing to dick around with an item that may have a hidden reserve price, for 2 reasons: 1) Ebay auctions aren't professional, and the reserve price may be idiotic, and 2) it's usually not worth the time when there are other non-reserve (or at least visible minimum price) items available.
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Eric, 30 May 2007 @ 8:26am

It is not only rational to hope that someone may place a higher bid than that of your "secret" reserve price it is what capitalism is based upon. Why set a given outward reserve price and only take that amount when you can make more money from someone who doesn't know what the item is worth. Rational yes, moral, possibly not.
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Rachel, 30 May 2007 @ 9:17am

I find the use of "rational" strange in this article. I agree with the data tho, I rarely bid on anything that "hasn't met the reserve" yet. Along the same lines of Ebay making sense, I found this list of things you CANNOT sell on Ebay. Strange since I've bought some of these. http://listafterlist.com/tabid/57/listid/71//Britneys+12Eaten+SandwichYes+Catalytic+ConvertersNo+The +Items+Youre+Not+Allowed+to+Sell+on+eBay.aspx
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"ill" duce, 31 May 2007 @ 2:28pm

Rationality and Consumption
I'm not certain you can say any purchase is rational outside of possible a captive or semi-captive market. Consumption in itself outside of the necessities (and one can argue the definition of the category)is an irrational act. Classical Economists are always focused on the price rather than the decision. A buyer is rational if he pays the right price, not if he buys the right piece.
I argued incessantly in Graduate school about the lack of inclusion of psychological aspects in Macroeconomic equations.
If a woman spends $650 for a pair of Manolos, is that rational? If that $650 was her rent money is that raional? Trying to apply rational constructs to buying is like trying to apply it to religion.
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