A Test of the Revenue Equivalence Theorem Using Field Experiments on Ebay

42 Pages Posted: 28 Jan 2005

See all articles by Tanjim Hossain

Tanjim Hossain

University of Toronto

John Morgan

University of California, Berkeley - Economic Analysis & Policy Group

Date Written: January 25, 2005

Abstract

We conducted 80 auctions on eBay. Forty of these auctions were for various popular music CDs while the remaining 40 auctions were for video games for Microsoft's Xbox gaming console. The revenue equivalence theorem states that any auction form having the same effective reserve price yields the same expected revenue. The effective reserve price on eBay consists of three components: the opening bid amount, the secret reserve amount, and the shipping and handling charge to keep the overall reserve level fixed. We set no secret reserve price and varied the opening bid and the shipping and handling charge to keep the overall reserve level fixed. When the effective reserve was $4, auctions with a low opening bid and high shipping charges attracted more bidders, earlier bidding, and yielded higher revenue than those with a high opening bid and low shipping charges. The same results hold only for Xbox games under the $8 effective reserve. Unlike the other treatments, where the reserve represents less than 30% of the retail price of the item, for CDs, the $8 effective reserve represents over 50% of the retail price of the item. In this treatment, we find no systematic difference in the number of bidders attracted to the auction or revenues as a function of how the effective reserve is allocated between opening bid and shipping charges. We show that these results can be accounted for by bounded-rational bidding behavior.

Keywords: Internet auctions, field experiments, test of revenue equivalence, behavioral economics, loss aversion

JEL Classification: C93, D44, L86

Suggested Citation

Hossain, Tanjim and Morgan, John, A Test of the Revenue Equivalence Theorem Using Field Experiments on Ebay (January 25, 2005). Available at SSRN: https://ssrn.com/abstract=655449 or http://dx.doi.org/10.2139/ssrn.655449

Tanjim Hossain (Contact Author)

University of Toronto ( email )

Toronto, Ontario M5S 3G8
Canada

John Morgan

University of California, Berkeley - Economic Analysis & Policy Group ( email )

Berkeley, CA 94720
United States
510-642-2669 (Phone)
810-885-5959 (Fax)

HOME PAGE: http://faculty.haas.berkeley.edu/rjmorgan/

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