Selling on Amazon #2 - Quasi Hyperbolic Discounting

+ECON's "Selling on Amazon" series includes tips on how to successfully sell products on Amazon based on experience and economic principles:

Post #1 - Background & Invitation to Become an Amazon Seller
Post #2 - Quasi-Hyperbolic Discounting (below!)
Post #3 - Left-Digit Bias (upcoming)
Post #4 - Condition Notes

Tip #1 - Beware of Quasi Hyperbolic Discounting (QHD)

I explain QHD (AKA "present bias" or "temporal discounting") conceptually and mathematically in this video.

What you need to understand is that you have a "present self" and "future self".  Your future you is much better at making decisions.  Your future self is working out, eating better, watching less junk, subscribing to +ECON, and an all-around better person than your present you (though I must applaud present you for reading the +ECON blog instead of this).

QHD in a nutshell: If I were to offer you a choice between $20 right now or $25 a week from now, research has shown you're most likely to choose the $20. If instead I offer $20 in 52 weeks or $25 in 53 weeks, your future self will likely decide to take the $25.  One year later, we meet again and I ask if you'd like the $20 right now or the $25 in a week; your present bias is likely to take the crisp Jackson and leave Lincoln on the table.

Your future self wants the extra $5, but your present self makes the decision.  Now, "a dollar today is better than a dollar tomorrow", but this choice is fundamentally different (unless your currency is experiencing hyper-inflation).

Let's apply QHD to Amazon pricing: Don't match the lowest price.  Instead, try to position yourself as the 3rd, 4th, or 5th price.  You're item might sell slower, but for a better price. Amazon and your present self want the low price because it means faster money, but it really means less money.  Additionally, Amazon only pays you every so often, so waiting an extra week or two to sell an item for a higher price might actually be a choice between $0 in a month or $5 in a month.

When I just opened my seller account, I was looking at the prices of a textbook I had to sell; the low price was around $60, as was the second lowest.  Interestingly, the third lowest price was around $95.  I realized that one person desperate for cash discounted the item tremendously, and the next person to list the product matched.  If I matched, I could sell faster (and possibly keep the price permanently lower, if people continued to match, etc.), or I could list just under the third seller, hold out for the other two to sell, and make about $35 more.  That's exactly what I did.  It took about two months to sell, but waiting gave me lunch for a week for minimal effort.  

Now you may be telling yourself that you'd rather have the $60 two months earlier, I'll counter by saying that it's likely all three of the bottom products were purchased in the same week.  This is because people usually demand books around the same time (e.g. the month before a semester starts, when a professor publishes the required book list, etc.). 

The only times you should match the low price are:

1. When you have a lot of products and need to make room in your home;
2. If the product is approaching a major depreciation. This often happens when a new version of the product is coming out (e.g. I sold my brother's iPad Mini the day before the new version was released - I sold it as the lowest price on the same day, but the next two days the price had dropped by 15 percent).

Disagree? Have questions? An experience? Comment below! My next post will be on how to incorporate left-digit effects in your pricing. Cheers!

For some application to daily life, Dan Ariely discusses how this and procrastination affect us in chapter seven of his book, "Predictably Irrational":