I have witnessed this first hand. I was losing sale after sale (daily) to sellers that listed an item for $9.99 with $9.99 in shipping while my item sat unsold at $13.99 with $5 in shipping.

Marginal Revolution:

Would you rather pay $10 and have free shipping or pay $5 and pay $6 for shipping? Answer: you prefer the latter. Well, at least if you are like most bidders on eBay.

Morgan and co-author Tanjim Hossain, an assistant professor at Hong Kong University of Science and Technology, held 80 auctions of new music CDs and Xbox video games to test how consumers respond to different price schemes. In the eBay study, they varied the opening bid price and shipping charges on identical CDs, ranging from Britney Spears to Nirvana, and video games, including Halo and NBA 2K2.

…A perfectly informed and fully rational consumer will merely add together the two parts of a price to obtain the total out-of-pocket price for an item and then decide whether to buy and how much to bid based on this total price.

But that’s not what happened in their eBay auctions…