11Perfect Competition Under eBay a Fact or a Factoid

Perfect Competition under eBay: A Fact or a Factoid? Ref. No.: ME0017

Perfect Competition under eBay: A Fact or a Factoid? The online auction giant eBay is an American website, headquartered in San Jose, California. It is the world’s online marketplace facilitating large-scale trade of varied items ranging from cars, real estate to collectibles, clothing, DVDs, and artwork. eBay was founded in September 1995 by Pierre Omidyar (Pierre), a software developer. Earlier, he had worked in Claris, a spin-off of the famed Apple Computers. eBay started in lines of something like a garage sale and the first product that it sold was a broken laser pointer. Pierre knew that he had created something big, when the broken laser pointer sold for $14.83.1 When the winning bidder was contacted to check if he understood that the laser pointer was broken, the buyer replied that he was a collector of broken laser pointers! Pierre, a French-born Iranian-American, acknowledged that he alone cannot put eBay into the corporate big leagues. In 1996, Jeffrey Skoll, with a MBA from Stanford, was hired. Soon in 1998, Meg Whitman (Meg), a Harvard Business School graduate, followed as the president and CEO. Meg had learned the crucial importance of branding from her enriched association with Hasbro, a worldwide leader in children’s and family leisure time products and services. She took the company public (Exhibit I), expanded it and successfully exceeded earnings predictions.

1

“Our History”, http://news.ebay.com/history.cfm,1995

This case study was written by Nitu Gupta under the guidance of Akshaya Kumar Jena, IBSCDC. It is intended to be used as the basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. The case was compiled from published sources. © 2009, IBSCDC. No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever without the permission of the copyright owner. Background Reading: Chapter 8, “Supply and Allocation in Competitive Markets”, Economics (Paul A. Samuelson and William D. Nordhaus)

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Perfect Competition under eBay: A Fact or a Factoid?

Exhibit I eBay’s IPO Information September 24th 1998

Date went Public Proposed Offer Price

$14.00– $16.00

Actual Offer Price

$18.00

First Day Open

$53.50

First Day Close

$47.38

Shares Offered (million)

3.50

Offering Amount (million)

$62.8

Underwriters

Goldman, Sachs & Co.

Compiled by the author from: “eBay reignites IPO market with 197% surge at opening”, http://findarticles.com/p/articles/ mi_m0CGN/is_n192/ai_21160806, September 25th 1998

Meg created an experienced management team by gathering her senior staff from companies such as Pepsico and Disney, and built a strong vision for the company. eBay intended to be a company that is in the business of connecting people. eBay has three business segments: Marketplaces, Payments and Communications (Exhibit II).

Exhibit II Revenue Diversification in eBay

Others

Communication Transaction

Payment Transaction

eBay Inc. has an increasingly diversified revenue model. In only three years, the company’s revenue from all sources other than Marketplaces transactions has jumped from 33% to 49% of eBay Inc.’s total revenue as of Q109. Marketplaces – International Transactions

Marketplaces – US Transactions

Source: “eBay Inc. Corporate Fact Sheet: Q1 2009”, http://files.shareholder.com/downloads/EBAYPRESS/ 558571619x0x204060/29A0BEDF-A666-4654-B1E4-C1D6DDC294A8/eBayIncFactsheet.pdf

The Marketplaces segment of eBay comprises online commerce platforms that allow buyers and sellers to interact and trade with one another globally. It intends to bring them together from any place in the world at any time through fully automated online websites, available 24/7. The platforms have as a feature, software tools and services, some of which are available free of cost and others for a fee to ensure efficient trading. The Marketplaces segment’s core online commerce platform is eBay.com and its local counterparts are in 39 countries. Its adjacent platforms consist of eBay’s classifieds website, as well as Half.com, Rent.com, Shopping.com and StubHub. The revenue for eBay’s 2

Perfect Competition under eBay: A Fact or a Factoid?

Marketplaces platforms are raised from the fee paid by sellers for listing, feature, subscription and final value fee. Apart from this, there are lead referral fee, transaction fee, advertising fee, etc., which act as the source of revenue. eBay.com had initially followed only its traditional auction-style format. However, when it realised that an obscure website called Half.com with its fixed-price system could become a potential threat to its floating-price auction model, it bought the company and brought into being, the latter’s fixed-price formats. In the traditional auction-style format, a seller is allowed to set a reserve price for the item – the minimum price at which the seller is willing to sell the item. In the fixed-price format, buyers and sellers experience an accelerated transaction process in comparison to traditional auction-style format, which necessitates waiting for the auction period to expire. eBay introduced fixed-price option to its auction listings with items with a ‘Buy It Now’ logo, which can be bought immediately for a set price. eBay’s classifieds website are designed to help people meet, share ideas and trade on a local level, and are available in lot of cities and regions of the world. Rent.com concerning rental-housing industry is a US listing website, aimed at bringing together apartment seekers and apartment managers. Shopping.com, which features products from thousands of merchants across the Internet, is a comparison shopping destination. StubHub is a US ticket marketplace, which facilitates fans to buy and sell tickets of various sports, entertainment events, etc. eBay’s Payments segment, PayPal, allows individuals and businesses to send as well as receive payments online. Its Communications segment, Skype Technologies S.A. (Skype), enables Voice over Internet Protocol (VoIP) communications and offers low-cost connectivity to traditional fixedline and mobile telephones. In November 2008, eBay acquired US-based online payments business, Bill Me Later.

eBay and Perfect Competition eBay is a place to buy, sell and window-shop. The products on the website are available at prices better than those one can find in traditional or online stores. Though there may be a few instances of bad deals on eBay, but careful buyers can always gain from this. Hence, there are large numbers of buyers on eBay. Individual seller, small retailer, or a big company – anyone can sell nearly anything by listing their items on eBay, if they are flexible enough regarding the price. eBay’s global approach ensures saleability of unusual items that aren’t in demand in their vicinity. This facilitates large number of sellers. eBay serves as one of the best places in the world to window- shop and compare. As huge variety of things are available with enormous details like what each one sold or is selling for, photos, detailed descriptions, owner experiences, etc., a lot of information is gained about the items offered at eBay. At eBay, transaction by individual buyer and seller is very small compared to the total volume of transactions. Both buyers and sellers at eBay are price takers. No individual buyer and seller can do anything to change that price. The eBay user agreement limits each user to 10 simultaneous listings for identical goods. Thus, there is no possibility for economies of scale, which has the potential to turn the largest firm into a monopoly. As of December 31st 2008, eBay’s Marketplaces had around 86.3 million active users globally. On eBay, every second, $2,000 worth of goods are traded by users

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Perfect Competition under eBay: A Fact or a Factoid?

across the world. In Q4-2008, 732 million new listings were added to eBay.com worldwide. About 113 million existing listings are available on eBay worldwide, and approximately 7.1 million additional listings per day, are freshly included.2 In the eBay market, competitive advertising does not occur because the products are categorised and sub-categorised into homogeneous ones. Competitive advertising would be simply redundant. However, generic advertising bereft of brand names, benefiting the industry as a whole, often does occur. Though within the different categories of goods available there are subcategories where the items are homogeneous, product differentiation is inherent in used goods. Goods are differentiated by wear. Entry or exit as a business in eBay is quite easy. Anyone who is computer literate and knows how to use Internet and has the desire, can sell or buy product from eBay. Several sellers of common products and several potential buyers are features of eBay. No cost is entailed for browsing and bidding on auctions, but sellers are to pay two kinds of charges. In order to list an item on eBay, a non-refundable insertion fee is charged. For optional upgrades to boost the listing – such as premium picture services and format enhancements through bold subtitles and highlighting – additional charges are levied. These are included in the insertion fee. A final value fee is charged if the listing ends with a winning bid. No final value fee is charged if there are no bids on an item, or if the reserve price is not met. Information costs are trivial under eBay. Comparison of prices by visiting different internet sites is quite easy. There are no browsing costs for buyers and the eBay fee schedule ensures identical selling costs for all sellers. Shipping and handling charges, signifying the travel costs generally differ depending on the good. However, in some instances, travel costs are cheaper than local sales taxes. Auctions under eBay, however, can be highly unpredictable instigating strange buyer behaviour. For instance, in late 2006, the new PlayStation 3 video-game system attracted a huge mass queuing for days outside retail stores to purchase it. For people who bought the playstation from stores and sold it on eBay, it fetched thousands of dollars for the $600 machines. However, resale prices of Apple’s iPhone, which drew similar crowds in mid-2007, were not lucrative enough on eBay.3 Ulrike Malmendier (Malmendier), an economist at the University of California at Berkeley, conducted quite an extensive research on eBay to reveal the mystery of such contrasting consumer behaviour. For example, she picked CashFlow 101, a personal-finance-themed board game, and tracked 166 auctions offering. Prior to this, during the 7-month trial, the game was sold online for $195 by the game designer. The researcher observed that eBay sellers offered an opening price of about $45 and “buy it now” price of about $125, which may be interpreted as a cool deal for the buyers. But some bidders grew so excited about winning the auction that instead of paying less than retail, to end the auction immediately or bidding in the hope of fetching an even lower price, they sometimes ended up paying more than $185. In 43% of the auctions, the bidders apparently paid 2

“eBay India Fast Facts”, http://pages.ebay.in/community/aboutebay/news/infastfacts.html, December 31st 2008

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Gaylord Chris,“Economists puzzled by irrational eBay buyers”, http://www.usatoday.com/tech/techinvestor/2007-07-17-economistsstudy-ebay-buyers_N.htm, July 17th 2007

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Perfect Competition under eBay: A Fact or a Factoid?

more than the ‘buy it now’ price. The economist found similar result in her extended research as well. Malmendier and her co-author, Stanford University economist Hanh Lee, refer to such buyer behaviour as ‘bidder’s curse’. The Romans term it as calor licitantis meaning ‘bidder’s heat’.4 eBay simulates many important features of perfect competition like large number of buyers and sellers, information symmetry, low barriers to entry and sub-categorisation of products on the basis of homogeneity. eBay is often cited as an eminently apt real world example of a perfectly competitive market. However, critics point out that products sub- categorised on the basis of homogeneity are strictly not homogenous products because of variation in period of original use as well as degree of wear and tear. Moreover, the products transacted under eBay do not affect resource allocation, the way the products usually do when they are produced to address the original demand. Prices, therefore, do not truly dictate the supply of products listed on eBay. While there are all these hair-splitting nobody has come up with a better instance of perfect competition that would comprise a host of items touching modern life.

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Gaylord Chris,“Economists puzzled by irrational eBay buyers”, http://www.usatoday.com/tech/techinvestor/2007-07-17-economistsstudy-ebay-buyers_N.htm, July 17th 2007