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Online auction: the effects of transaction probability and listing price on a seller’s decision-making behavior

Abstract

This study seeks to the answer the question of how an individual would trade off between listing fee (i.e., cost of listing an auction item) and transaction probability (i.e., the chance that a product will be sold). Applying the trade-off decision-making paradigm into the auction context, we examine a seller’s choice of online auction outlet and subsequent starting price strategies when facing the trade-off between transaction probability and listing fee. Results from a set of laboratory experiments suggest that a seller would be willing to incur a high cost in exchange for a higher transaction prospect. Furthermore, if the expected transaction probability is high, a seller is more likely to set a high starting price despite incurring a high listing fee. The implications for theory and practice are discussed.

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Notes

  1. 1.

    Luckling-Reiley (2000, p. 249), who collected data on Yahoo!Auction, eBay and Amazon separately in 1999, observed “difference in fees appears to have an important effect on sellers’ incentives and behavior. With fees (even small ones) for auction listings, a seller has more incentive to make sure that her auction results in an actual transaction. Indeed a quick check revealed that most Yahoo!Auction had very high minimum bids or reserve prices, with the sellers apparently hoping for someone to come along and be willing to pay their high prices. By contrast, at eBay and Amazon, sellers knew that they would incur a listing fee whether the item sold or not, so they had an incentive to set reasonably low reserve prices to increase the probability of an actual transaction. Our summer 1999 data confirmed the existence of this effect: eBay had 54% of all auctions result in a sale, Amazon’s fraction was 38%, while Yahoo!’s fraction was only 16%. With five-sixths of its auctions failing to receive any acceptable bids, Yahoo! had a significantly lower auction transaction rate than either eBay or Amazon. Thus incentives may be working in the predicted direction: the higher the listing fee, the more careful sellers are to design an auction listing which actually results in a transaction.”

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Acknowledgment

The authors like to thank Mr. Li Zhu at the National University of Singapore for his assistance during the data collection.

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Correspondence to Chuan-Hoo Tan.

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Responsible editor: Hans-Dieter Zimmermann

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Tan, CH., Teo, HH. & Xu, H. Online auction: the effects of transaction probability and listing price on a seller’s decision-making behavior. Electron Markets 20, 67–79 (2010). https://doi.org/10.1007/s12525-010-0029-8

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Keywords

  • Online auction
  • Decision-making
  • Seller behavior

JEL

  • D44 – Auctions