EBAY CASE STUDY

The online auction giant eBay is an American website, headquartered in San Jose, California.
It is the worlds 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 S14.83.[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 childrens and family leisure time products and services.
She took the company public (Exhibit I), expanded it and successfully exceeded earnings
predictions.
Exhibit I eBays IPO Information
Date went Public September 24
th
1998
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://fmdarticles.com/p/articles/ mi_m0CGN/is_n192/ai_21160806, September 25
th
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).


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
segments core online commerce platform is eBay.com and its local counterparts are in 39
countries. Its adjacent platforms consist of eBays classifieds website, as well as Half.com,
Rent.com, Shopping.com and StubHub. The revenue for eBays 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 latters 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. eBays 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 ofthe 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.
eBays 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 fixed- line 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, ifthey are flexible enough
regarding the price. eBays global approach ensures saleability of unusual items that arent 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, eBays Marketplaces had around 86.3 million active users globally. On eBay, every
second, $2,000 worth of goods are traded by users 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 ifthe listing ends with a winning
bid. No final value fee is charged ifthere 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 Apples 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 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
bidders curse. The Romans term it as calor licitantis meaning bidders 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.