A new paper by Dan Elfenbein and Brian McManus looks at charity auctions on eBay to see whether giving part of the auction proceeds to charity raises bid prices. Here is the abstract:
Will consumers pay higher prices for products linked to charitable causes? To answer this question, we analyze a novel data set that matches nearly identical products sold on eBay via charity and non-charity auctions. Overall, items sold through charity auctions have higher prices. When sellers dedicate 10% of an auction’s final price to a charitable cause, the winning bid is 10 to 12% percent higher than in non-charity auctions. When all of an auction’s revenue is dedicate to charity, final prices are 6 to 10% higher. The observed price premiums are consistent with a simple model of charity auction participation.
Additionally, we examine the frequency with which auction listings are viewed, the number of bidders and bids placed, and the timing of these bids. Our analysis suggests that the observed price premiums are due to more aggressive bidding by individual bidders rather than increased auction visibility or differences in the number of bidders. Moreover, we find that bids are submitted earlier within charity auctions. This reduction in sniping is consistent with the public goods nature of charity auction revenue.
Notice that what is interesting about this is that, for purely self-interested bidders, there should no difference between charity and non-charity auctions; that is, in a charity auction, the seller is giving the full amount of the charitable donation. However, here revenues are higher. Indeed, for a good that would ordinarily sell for $100, the charity auction would have it sell for as much as $112 with $11.2 going to charity and $100.08 going to the seller. In this case, not only does the seller not end up giving anything but earns a little bit more! This relates to the fairtrade options for coffee and other goods (click here)
Also, interesting is the result that when more revenue is going to charity, the bid prices do not rise by as much. They argue that:
[t]his could be due to decreasing marginal utility from charity contributions, bidders’ desire to directly donate to a charity of their own choosing (rather than a seller’s choosing) if the donation is large, or simply differences in the tastes of bidders who choose to purchase items which have relatively high prices.
Not sure about that one but again the data from eBay being put to good use.
On an analytical level, this makes no sense. Given a choice between paying $110 for something, or paying $100 for a similar item and making a tax-deductible $10 donation to a charity of my choice, surely a rational actor would choose the second option?
Given that the seller makes barely any extra revenue from charity auctions, doesn’t this look a bit like competition driving the economic profit on charity auctions down to zero? It seems to cast doubt on the idea that sellers might be motivated by altruism if the compensating higher price makes up very closely for foregone earnings.