Non-value-added activity at three different publicly traded organizations

 

 

 

 

eBay operates the world’s largest online auction. It is a multi-billion dollar business, which in 2018 generated nearly $11 billion in revenue from its operations in about 33 countries. Sellers pay a small fee to eBay to list their items. They provide a description of the item, photographs, the minimum acceptable bid, accepted forms of payment, and other relevant information. Items can be sold at a fixed price or through an auction. In an auction, bidders submit electronic bids over the Internet. After the auction closes (auctions usually last several days), the high bidder receives an e-mail. The high bidder must contact the seller within three business days to claim the item and arrange payment and delivery. eBay provides other support services:

The Feedback Forum is a place where eBay users leave comments about each other’s buying and selling experiences. If you are a bidder, you can check the seller’s Feedback Profile easily before you place a bid to learn about the other buyers’ experience. If you’re a seller, you can do the same thing to check out buyers. Each participant is given a Feedback Score based on the number of positive and negative ratings they have received. Participants with sufficient positive ratings are flagged by colored stars. The highest rating is the “Red shooting star.” eBay has created a set of policies to guard against “feedback manipulation” and “feedback abuse.”

eBay users are encouraged to settle transactions through PayPal. PayPal provides free insurance of up to $2,000 on some items to protect buyers in cases where they do not receive the item or it was less than expected.

Participants sign user agreements that specify the trading rules and expectations. eBay’s safety staff investigates alleged misuses at eBay such as fraud, trading offenses, and illegally listed items. Potential resolutions include such things as banning a person from future trading on eBay.

How does eBay create value?

What potential contracting problems exist on eBay?

How does eBay address these problems?

What are the contracting costs at eBay?

eBay claims that it has only a small problem with fraud and misuse of the system. Does this imply that it is overinvesting in addressing potential contracting problems? Underinvesting? Explain.

*To obtain more detailed information, go to www.ebay.com.

 

 

 

Increased Efficiency and Reach: It lowers the search and transaction costs for buyers looking for specialized or vintage goods that may not be available locally. Sellers gain instant access to a global customer base without needing their own e-commerce infrastructure.

Trust and Reduced Asymmetry: Through its support services (like PayPal and the Feedback Forum), eBay attempts to solve the fundamental problem of trust in anonymous online transactions, making users comfortable trading with strangers.

 

Potential Contracting Problems on eBay

 

eBay's decentralized, asynchronous, and anonymous nature presents several potential contracting problems (opportunistic behaviors) that can lead to market failure if unaddressed:

Adverse Selection (Pre-Contractual): Occurs because one party (usually the seller) has private information about the quality of the item that the other party (the buyer) lacks.

Example: A seller knows a watch is fake, but lists it as genuine. Buyers, fearing low quality, may only be willing to offer a low price, driving high-quality sellers off the platform (the "lemons problem").

Moral Hazard (Post-Contractual): Occurs after the contract (sale) is initiated, as one party (either buyer or seller) may engage in opportunistic, undesirable behavior.

Examples: A seller fails to ship the item after receiving payment, or a buyer claims the item was damaged when it arrived intact to secure a refund.

 

Sample Answer

 

 

 

 

 

 

 

 

eBay is a multi-sided platform that primarily creates value by facilitating transactions between a vast network of decentralized buyers and sellers globally. The structure of its platform naturally gives rise to specific contracting problems inherent to anonymous online trading, which eBay mitigates through various mechanisms.

 

How Does eBay Create Value?

 

eBay creates value primarily through its role as a market maker and trust facilitator (Tadelis, 2018):

Network Effects: eBay aggregates millions of buyers and sellers, generating strong two-sided network effects. A large number of sellers attracts more buyers, and a large number of buyers attracts more sellers, creating liquidity and maximizing the probability that any unique item will be found and sold.

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