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1107 PD: Buying and selling tractors on eBay: Differences from in-person auctions

Florian Diekmann, Brian E. Roe and Marvin T. Batte Published on 29 October 2007

Few sounds capture the rhythm of agricultural economies better than the syncopated cadence of an auctioneer echoing across a clutch of farmers gathered around the auction block.

This seemingly timeless portrait of economic exchange in rural America has changed, however, as advances in technology alter the way auctions are conducted. The advent of telephone bidding, video links and, more recently, Internet bidding platforms change the nature of auctions by broadening the pool of potential sellers and bidders.

As the commercial success of eBay and other online auction sites suggest, the Internet provides many possible advantages over in-person auctions.

Internet auction sites provide extensive listings and powerful search technologies, which can create markets for specialized product categories, even when buyers and sellers are geographically dispersed.

This issue is particularly important for U.S. agriculture because, as production becomes increasingly concentrated among fewer entities, the number of potential bidders within a given radius of any particular location continues to diminish.

A key strength of the Internet – the pooling of bidders from geographically dispersed locations – can also be a weakness, as distance removes a critical advantage of in-person auctions – bidders directly inspecting merchandise.

While some Internet sites that hold agricultural equipment auctions attempt to directly offset this weakness by providing inspection services, the most widely used Internet auction site, eBay, does not provide such up-front risk mitigation services.

eBay does other things, however, including the posting of reliability ratings of individual sellers and the use of online photos and videos that allow buyers to inspect aspects of goods from a distance.

Starting in June of 2005, eBay also began offering its Buyer Protection Plan, an after-the-fact risk mitigation service to business equipment purchasers in the form of a fraud protection policy that refunds buyers’ outlays up to $20,000 for business equipment (including farm equipment) sold by eBay sellers in the case of seller fraud or undisclosed equipment defects.

Key questions
As online sales of farm equipment become more widespread, questions arise about the nature of price determination in online versus traditional markets. We present empirical evidence from recent auctions for used farm tractors conducted on eBay and via in-person auctions. In this [article] we focus on the question: Does comparable equipment sell for the same on eBay and at in-person auctions?

Data
To answer this question we use data from Internet and in-person used tractor auctions conducted between June 1, 2005 and March 31, 2006 in 11 Midwestern states (Iowa, Illinois, Indiana, Kansas, Michigan, Minnesota, Nebraska, North Dakota, Ohio, South Dakota and Wisconsin).

The Internet sample was purchased through eBay’s service provider program. The data includes information about auctions that took place in eBay’s “Tractor and Farm Machinery” category, including the final sales price, make, model, engine horsepower, year, hours of use, auction date, seller zip code and other information describing the auction items and the nature of the auction.

The in-person auction data was purchased from Machinery Pete’s Farm Equipment FACT’s Report, which summarizes results from retirement, estate, dealer and consignment auctions reported by a network of more than 600 auctioneers.

The FACT’s information includes sales price, make, model, engine horsepower, year, hours of use, auction date and location (region within a state) and other descriptive information.

The data do not represent the entire universe of used tractor transactions for the Midwest during this period, as other Internet auction sites regularly transact tractors and some auctioneers may not report to the FACT’s Report, but this likely represents a wide, representative sample from the universe of used tractors.

Several filters were applied to each data set to arrive at a sample used for analysis. For both samples, tractors with model years earlier than 1960 were excluded to focus on tractors that were most likely purchased for operational rather than collectible purposes.

Also, tractors of 30 horsepower and less were excluded to focus on tractors most likely to be used in agriculture rather than nursery or landscape operations. Items that were classified by the seller as “for parts” or “not running” and items that were sold with expensive additional implements such as backhoes were excluded. Items with less expensive implements such as loaders or mowers were included.

Finally, the data set was also limited to the 13 manufacturers (makes) that contributed more than 89 percent of sample observations (John Deere, International Harvester, Massey Ferguson, Ford, Case, Case IH, New Holland, Ford-New Holland, Allis Chalmers, Oliver, White, Versatile and Belarus). The complete data set included 588 eBay observations (about 30 percent of all observations) and 1,770 in-person observations for a total of 2,358.

Approach
The way we approach answering our key question is to find the statistical relationship between the price of a used tractor and its key attributes like horsepower, hours, age, manufacturer and transmission type. This is known as the hedonic modeling approach.

We use the data and some statistical techniques to develop this relationship for both tractors sold on eBay and in-person auctions. We then predict each tractor’s sale price for both auction venues (eBay and in-person), apply the relevant commissions and calculate the difference.

We’ll note a couple things about commissions. eBay commissions for business and industrial capital equipment sales are 1 percent of the final sale price with a maximum charge of $250, a $20 listing fee and a variety of optional fixed-fee listing enhancements (e.g., bold lettering) targeted to improve item visibility among potential bidders. (We assume $55 in additional fees.)

In-person auctions feature commissions that typically range from 2.5 percent to 15 percent, often with no limit on the maximum total commission paid.

To the best of our knowledge, detailed information concerning the average commission structures for U.S. farm equipment auctions is not available, though industry sources suggest that the bulk of commissions fall in the 5 to 10 percent range.

The data provided to us from the FACT’s report does not include information concerning the commission or fees charged. As a point of reference, we list the commission structure of an Internet-based auction house, IronPlanet.com, which provides features similar to that of an in-person auction company, including equipment inspection and lien searches. This firm features a block-rate commission structure.

We also assume each sale costs an additional $450 in fees. The eBay – in-person difference between the total commissions paid for various sales prices can vary dramatically; the difference for a $1,000 item is about $100 and the difference for a $100,000 item is more than $6,000.

Summary
Markets for durable and non-durable agricultural inputs are being altered by the emergence of Internet-based trading venues. We explore differences between Internet and traditional markets for used tractors using data from eBay and in-person used tractor auctions.

We find the average price received in eBay auctions is substantially lower than that received in in-person auctions; the average tractor in our sample is predicted to generate nearly $10,000 less in net sales revenue if sold on eBay.

However, the percentage discount for eBay tractors is smaller for items that sell for less than $20,000 – the price threshold beyond which goods are no longer covered by eBay’s Buyer Protection Program.

In fact, for the most frequently traded model in our data set (the John Deere 4020), which normally sells for prices well below the $20,000 threshold, the distribution of prices obtained in eBay and in-person auctions is no different.

This suggests that, from the buyer’s point of view, purchasing newer, more powerful tractors on eBay may offer the opportunity to source key capital inputs at a discount compared to traditional in-person auctions.

However, these buyers must bear additional risk both because they cannot be present to personally inspect the merchandise and because occurrences of fraud or misrepresentation cannot be fully covered under existing eBay’s Buyer Protection Program, which currently covers items up to only $20,000.

From a seller’s point of view eBay is attractive because it offers great flexibility (e.g., absolute freedom to choose sale dates, no transportation of equipment to a central location) and low commissions (capped at $250).

However, for tractors that sellers think will sell above the $20,000 limit of the eBay buyer protection program, our calculations suggest that in-person auctions generate greater total seller revenue (i.e., the higher commissions paid to in-person auctioneers are outstripped by higher selling prices.)

Indeed, the in-person flat commission rate that we predict would equalize seller revenues gained from eBay and in-person auctions averages 31.3 percent, which is double the highest commission charged by in-person auctioneers.

Smaller, older tractors, which commonly sell for prices less than $20,000, can often generate more revenue if sold on eBay.

The in-person flat commission rate that would equalize seller revenues gained from eBay and in-person auctions averages only 29.2 percent across our sample of used tractors that sell for less than $20,000, while 39 percent of the tractors that sold for less than $20,000 in our sample are predicted to generate more seller revenue, if sold on eBay. For the Internet-savvy seller with older tractors to sell, eBay may be an attractive sales outlet.  PD

—Excerpts from Ohio AgManager website (ohioagmanager.osu.edu)

Brian Roe

Q. Have you seen any changes in the sales values that used tractors are commanding on the Internet right  now?

We have not had a chance to monitor the situation over the past year, but will be following up our research beginning next year.  In fact, some readers may get a survey in the mail from us at Ohio State sometime in 2008 or 2009 asking for their experiences with eBay and other forms of online equipment sales.

I can say that the internet is becoming a more integral part of the farm equipment marketplace, though eBay is only a small part of this increasing segment.

Q. Did the results of your data analysis surprise you? Why or why not?

I was not terribly surprised by the fact that many tractors sold for less on eBay. Compared to auctions, eBay involves fewer costs of selling and buying – less transportation and lower commissions. It may also attract tractors that have more wear and tear or have had problems because it may be more difficult for buyers to inspect the equipment, and this fact may drive eBay bids lower than most auction bidding. The big question that we hope to try to answer with more research is which reason is driving the price difference we observe.

 

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