Lower Starting Bids Result in Higher Value in Auctions

Results of the “Starting Low but Ending High: A Reversal of Anchoring Effects and Auctions” study in 2006 conducted by Gillian Ku et al showed that contrary to popular belief of “start high, end high” effects in individual and dyadic negotiations, when it comes to auctions, lower starting bids result in higher final prices.

Three causal mechanisms have been put forth by the researchers as to why this is the case:

Lower starting prices present lower barriers of entry meaning more low-cost bidders can now bid
Economically, more bidders means more bids, thus resulting in higher probability of a higher final price
Bidders might also be attracted to what is now an “active” bid. Bidders may use bidding activity to assess an item’s value – equating more bidding to higher value – thus, increasing traffic and resulting in a higher final price.

Part one of the study tested whether lower starting bids would increase bidding activity by running tests asking students to participate in bidding for a $20 bill. Results showed that auctions starting with a lower bidding amount of $1 contrasted to $10 had participates rating more likely to place the initial starting bid and consequently place more bids.

Part two of the study sought to see if lower starting prices would have a full reversal of the anchoring effect (Anchoring effect being the cognitive bias of a person relying too heavily on the first piece of information acquired). Participants were asked to guess the value of a shirt on Ebay given either $1 or $24.99 as the starting bid. Results showed starting bids had an assimilating effect on value judgements, with lower starting bids generating lower value estimates (as predicted by the anchoring effect). At the same time, in the social setting of an auction lower starting bids began the process for the behavioural reversal of the anchoring effect increasing likelihood of individuals to join in the auction and place bid.