<http://online.wsj.com/article_print/0,,SB109744444984841427,00.html> The Wall Street Journal October 11, 2004 PORTALS By LEE GOMES E-Commerce Sites Make Great Laboratory For Today's Economists October 11, 2004 Calling them eBayologists doesn't sound quite right; Amazonists is even worse. There may not be a good name for them, but for a growing number of academics trying to test ivory-tower theories in the real world, the big online commerce sites are the new place to be. Especially for economists, Web sites and their untold millions of interactions are perfect real-world laboratories. For instance, a fast-growing specialty in economics is "auction theory," which, as the name suggests, tries to tease out the basic patterns by which auctions operate. Before eBay, an aspiring auction theorist didn't have much data to work with. As a result, many of them spent time sifting and resifting through a limited set of data on government wireless spectrum auctions of the 1990s for their auction insights. But now, with eBay and the rest, there are more data than even the most dedicated graduate student would know what to do with. EBay itself even helps with this, supplying anonymized data to university researchers under special arrangement. What exactly are economists learning? Frankly, the conclusions aren't the sort that would cause a layperson's jaw to drop; many are the sort that only a microeconomist would love. For instance, one of the cardinal rules of eBay involves the importance of a seller's reputation, or the rating given the person by those who have done business with him or her. Luis M.B. Cabral, an economist at NYU's business school, says that for an economist, it wouldn't have been immediately obvious that the eBay ranking would be important -- partly because reputations on eBay, unlike those in the real world, are essentially anonymous. But not only is reputation important, Prof. Cabral found, but it affects the prices sellers can charge and the amount of merchandise they can move. In one study, he looked at what happens to sellers with perfect ratings who receive their first piece of negative feedback. Not only did they begin selling less, but they entered a kind of downward spiral, with fewer sales and a declining reputation. "It really makes a huge difference," Prof. Cabral says. Another academic foray into the online world ended up confirming the power of brand names. Conventional wisdom among most American economists would be that prices on Web sites should be essentially the same. After all, Internet users all have "perfect information" about what everyone is charging, and they face few, if any, "switching costs" in moving from one supplier to the next. But Judith A. Chevalier, an economist at the University of Chicago business school, looked at price differences between Amazon and Barnes & Noble and found that Amazon was consistently able to charge more. And in a separate study, she found that Amazon's customer-written reviews of books do indeed affect sales, with negative reviews having more of an impact than positive ones. Prof. Chevalier theorized that prospective shoppers may suspect positive reviews are some sort of shill for the author but don't bring comparable skepticism to negative notices. Even with all the interest by researchers, some of the questions posed by the e-commerce sites remain unresolved. One of them involves the usefulness of "sniping," which occurs when a prospective buyer in an auction doesn't get involved in the bidding until the last minute, and then makes an offer the others don't have time to top. The practice works only on eBay-style auctions, which have fixed time limits. There are many eBay users who swear by the practice. In fact, there are even a number of services that will snipe for you automatically. David Reiley, a University of Arizona economist, says that for certain kinds of auction items -- including standardized electronic gear with many different bidders -- studies suggest that snipers don't do better than anyone else, either in their success rate in winning their items or in the price they end up paying. But he says there may be other kinds of merchandise, such as those with fewer bidders or prices that aren't easy to determine, where buyers should, in fact, snipe. Even that could change, he notes, if everyone sniped. It is currently unclear how many people on eBay engage in the practice. Not all of the work being done online by economists is theoretical, and savvy eBay traders would be wise to acquaint themselves with some of the literature. Lucking Reiley, for instance, along with a colleague, Rama Katkar, wanted to find out if it was better to publicly set a minimum bid for an item or to use an eBay feature called a "secret reserve," which rejects bids below a certain dollar amount without telling bidders what the minimum is. By comparing 50 pairs of identical items, one with the secret minimum and one without, the economists concluded that the secret minimum dissuaded buyers from participating in the auction, thus driving down prices. The study was done using Pokimon cards, but the finding, presumably, could hold true for anything: Beanie Babies, lawn gnomes, you name it. -- ----------------- R. A. Hettinga <mailto: rah@ibuc.com> The Internet Bearer Underwriting Corporation <http://www.ibuc.com/> 44 Farquhar Street, Boston, MA 02131 USA "... however it may deserve respect for its usefulness and antiquity, [predicting the end of the world] has not been found agreeable to experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'