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.
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.
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.
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.
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.
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Credits: Image by freeimages.com/ Craig Hauger