The Effects of Shipping Costs on Bidder Entry and Seller Revenues in eBay Auctions

Standard auction theory predicts that shipping cost, which along with the minimum starting bid comprise the effective reserve of an auction, should have the same effect on auction outcomes as the starting bid. However, previous research indicates that bidders do not fully incorporate shipping cost when bidding. To examine the effects of shipping cost on eBay auctions, we look at completed auctions for five different items: a trading card, a DVD, a gold coin, a silver proof set, and a laptop. In our analysis, we find across all items that bidders do not fully incorporate shipping cost when they bid. Furthermore, dollar for dollar, increasing shipping cost yields higher revenues than increasing the minimum starting bid, conditional on sale. Shipping cost also has a smaller negative effect on the number of bidders and the probability of an auction having no bids than the starting bid. * I would like to thank Professor Jonathan Levin for his invaluable support throughout this project, Darren Kempiners for his assistance with learning Perl, and Sandra Tyan for proofreading this thesis. Sean Tyan May 10, 2005