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eBay and AuctionseBay and Auctions

eBay OvervieweBay Overview

World’s largest “online trading World’s largest “online trading community”community”

Current number of users:Current number of users:Approx. 30MApprox. 30M(2M end of 1998; 12M middle of (2M end of 1998; 12M middle of

2000)2000) Offers a global marketplace for Offers a global marketplace for

individuals worldwide to buy and individuals worldwide to buy and sell from one another. sell from one another.

eBay StatisticseBay Statistics

As of 4Q 2002:As of 4Q 2002: 2500 employees2500 employees 12 million items listed per day12 million items listed per day in 18,000 categoriesin 18,000 categories value of goods sold in 2002: $14.2Bvalue of goods sold in 2002: $14.2B achieved $0.28 earnings per shareachieved $0.28 earnings per share stock price (close 2/14/03): 75.00stock price (close 2/14/03): 75.00 52-week range: 48.85—78.8052-week range: 48.85—78.80

eBay: Stock Price (eBay: Stock Price (EBAYEBAY))Source: Quicken.com (close 2/14/2003)Source: Quicken.com (close 2/14/2003)

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eBay: Quarterly RevenueseBay: Quarterly RevenuesSource: eBay Earnings ReleasesSource: eBay Earnings Releases

eBay Business ModeleBay Business Model

Sellers pay small fee (<$2) per listed Sellers pay small fee (<$2) per listed item.item.

eBay takes a cut (~2.5%) of each sale.eBay takes a cut (~2.5%) of each sale.Sellers are willing to pay this fee, because it’sSellers are willing to pay this fee, because it’sa very small price to pay compared to the a very small price to pay compared to the global exposure they get.global exposure they get.

Although the percentage earned on any Although the percentage earned on any given item is small, this is profitable for given item is small, this is profitable for eBay precisely because the market is eBay precisely because the market is global: over 500,000 new items are added global: over 500,000 new items are added to the site everyday.to the site everyday.

Business Model (continued)Business Model (continued)

Buyers and sellers handle exchange and Buyers and sellers handle exchange and payment (but, eBay offers support for payment (but, eBay offers support for PayPal exchanges).PayPal exchanges).

eBay has no inventory, no transportation, eBay has no inventory, no transportation, no costs at all except website operationno costs at all except website operation..

Conventional wisdom:Conventional wisdom: Service is Service is technicallytechnically commoditizable, but strong commoditizable, but strong network effects favor eBay.network effects favor eBay.

Market CharacteristicsMarket Characteristics eBay was rather unique at its inception in eBay was rather unique at its inception in

1995, but many alternatives exist today 1995, but many alternatives exist today including including www.epier.comwww.epier.com, , www.ubid.comwww.ubid.com, , and recently and recently www.amazon.comwww.amazon.com..

eBay’s original dominance causes a eBay’s original dominance causes a network effect and perpetuates its network effect and perpetuates its continued dominance:continued dominance:1)1) Sellers want to sell their item on the auction Sellers want to sell their item on the auction

service with the most buyers, so they put their service with the most buyers, so they put their items up for sale on eBay.items up for sale on eBay.

2)2) Buyers want to find the best prices with many Buyers want to find the best prices with many sellers, so they go to eBay.sellers, so they go to eBay.

3)3) Because of (1) and (2), eBay is even bigger Because of (1) and (2), eBay is even bigger than it was before. Repeat from (1). than it was before. Repeat from (1).

““eBay is a Venue”eBay is a Venue”Source: eBay User AgreementSource: eBay User Agreement

““We are not involved in the actual transaction We are not involved in the actual transaction between buyers and sellers. As a result, we between buyers and sellers. As a result, we have no control over the quality, safety or have no control over the quality, safety or legality of the items advertised, the truth or legality of the items advertised, the truth or accuracy of the listings, the ability of sellers accuracy of the listings, the ability of sellers to sell items or the ability of buyers to buy to sell items or the ability of buyers to buy items. We cannot ensure that a buyer or seller items. We cannot ensure that a buyer or seller will actually complete a transaction.” (Sec. will actually complete a transaction.” (Sec. 3.1)3.1)

“… “… because user verification on the Internet is because user verification on the Internet is difficult, eBay cannot and does not confirm difficult, eBay cannot and does not confirm each user's purported identity. Thus, we have each user's purported identity. Thus, we have established a user-initiated feedback system established a user-initiated feedback system to help you evaluate with whom you are to help you evaluate with whom you are dealing…” (Sec. 3.3)dealing…” (Sec. 3.3)

The eBay Rating SystemThe eBay Rating System

Every registered user ID has a public Every registered user ID has a public feedback profile attached to it.feedback profile attached to it.

eBay members can fill out a feedback eBay members can fill out a feedback form to voice comments about a user:form to voice comments about a user: to indicate a successful transactionto indicate a successful transaction to express unusually good qualitiesto express unusually good qualities to make complaintsto make complaints

Members receive points based on the Members receive points based on the rank (positive or negative) of rank (positive or negative) of comments. Feedback cannot be erased.comments. Feedback cannot be erased.

eBay HistoryeBay History

1995: Founded by Pierre Omidyar1995: Founded by Pierre Omidyaron Labor Dayon Labor Day

1998: IPO in September at $18/share1998: IPO in September at $18/share 2000: All-time high stock price of 2000: All-time high stock price of

$127/share in March. Value of goods $127/share in March. Value of goods traded on eBay in 2000 is over $5B.traded on eBay in 2000 is over $5B.

2001-02: Expand with new features and 2001-02: Expand with new features and buyer & seller tools. Invest in foreign buyer & seller tools. Invest in foreign communities (like MercadoLibre in Latin communities (like MercadoLibre in Latin America).America).

Buy-It-Now FeatureBuy-It-Now Feature

The seller can specify a price at which The seller can specify a price at which (s)he would be willing to sell the item to (s)he would be willing to sell the item to any buyer who meets that price.any buyer who meets that price.

This gives buyers the option of buying the This gives buyers the option of buying the item instantly for a known price, without item instantly for a known price, without waiting for the auction to end.waiting for the auction to end.

Sellers are presented with options when Sellers are presented with options when listing an item: fixed-price, online auction listing an item: fixed-price, online auction only, and online auction + Buy-It-Now.only, and online auction + Buy-It-Now.

Acquisition of PayPalAcquisition of PayPal

PayPal uses existing electronic PayPal uses existing electronic infrastructure of bank accounts and credit infrastructure of bank accounts and credit cards to allow “small” monetary cards to allow “small” monetary exchanges online.exchanges online.

PayPal is convenient for small businesses PayPal is convenient for small businesses and individuals, because they can collect and individuals, because they can collect online payments without difficult set-up.online payments without difficult set-up.

eBay acquired PayPal in 2002 and has eBay acquired PayPal in 2002 and has integrated it throughout its website as a integrated it throughout its website as a payment option for auctions.payment option for auctions.

eBay Branches OuteBay Branches Out Acquired Half.com, a fixed-price online marketplace,Acquired Half.com, a fixed-price online marketplace,

in July, 2000. in July, 2000. Identical to eBay in all respects except that prices are fixed. Identical to eBay in all respects except that prices are fixed. It has since grown tremendously and is doing very well, It has since grown tremendously and is doing very well,

listing over 100 million items today. eBay sellers are listing over 100 million items today. eBay sellers are offered fixed-price option up front.offered fixed-price option up front.

Sale of “distressed inventory” from companies Sale of “distressed inventory” from companies through eBay stores.through eBay stores.

Good way for companies to recover costs from older and/or Good way for companies to recover costs from older and/or excess equipment. The most prominent example is IBM excess equipment. The most prominent example is IBM ((http://www.ebaystores.com/ibmhttp://www.ebaystores.com/ibm).).

Auction of art and/or luxury goods, through online Auction of art and/or luxury goods, through online partnership with partnership with sothebys.comsothebys.com..

Technical Foundations of Internet Technical Foundations of Internet C2C CommerceC2C Commerce

Market Design (Market Design (e.g.e.g., Auction Types), Auction Types) Payment Systems (can’t always use Payment Systems (can’t always use

credit cards)credit cards) E-Market OperationsE-Market Operations

Website Design Issues (Website Design Issues (e.g.e.g., UI), UI) System Reliability and AvailabilitySystem Reliability and Availability

Massive Scale Commercial-Massive Scale Commercial-Website OperationWebsite Operation

eBay scale:eBay scale:Approximately 30M users.Approximately 30M users.

Over 500K items added each day.Over 500K items added each day.

Massive strain on website reliability Massive strain on website reliability and availability.and availability.

Major issue for high-traffic B2C sites, Major issue for high-traffic B2C sites, too.too.

June 1999: Three eBay June 1999: Three eBay CrashesCrashes

eBay service unavailable for eBay service unavailable for “prolonged” periods of time.“prolonged” periods of time.

Revenue-loss estimates: $3M to Revenue-loss estimates: $3M to $5M$5M

Stock-price fall: 20%Stock-price fall: 20% Blamed on ISP router failure and Blamed on ISP router failure and

SUN OS “memory bugs.”SUN OS “memory bugs.”

eBay started outsourcing (using eBay started outsourcing (using Exodus, before its bankruptcy).Exodus, before its bankruptcy).

Auction TypesAuction Types

Ascending bid structureAscending bid structure Descending bid structureDescending bid structure First-price, sealed bidFirst-price, sealed bid

Second-price, sealed bid (Vickrey):Second-price, sealed bid (Vickrey): Highest bidder gets itemHighest bidder gets item Pays second-highest bid pricePays second-highest bid price Advantages: “Strategyproof,”Advantages: “Strategyproof,”

user-friendlyuser-friendly

Auction Design inAuction Design inC2C CommerceC2C Commerce

Why Auctions?Why Auctions?Hard for typical C2C seller to do market Hard for typical C2C seller to do market research and set optimal fixed price. Auctions research and set optimal fixed price. Auctions allow seller to maximize revenue.allow seller to maximize revenue.

eBay ascending-bid auctions include:eBay ascending-bid auctions include: Starting PriceStarting Price Ending TimeEnding Time Bid IncrementBid Increment (Sometimes) reservation price(Sometimes) reservation price ““Proxy bidding agents”Proxy bidding agents”

eBay Ascending-Bid Auctions eBay Ascending-Bid Auctions (continued)(continued)

Technically equivalent to 2Technically equivalent to 2ndnd-price Vickrey-price Vickrey Importance of “strategyproofness”:Importance of “strategyproofness”:

Buyers, like sellers, will have little or no Buyers, like sellers, will have little or no information about others’ valuations of the information about others’ valuations of the items; so “dominant-strategy solution concept” items; so “dominant-strategy solution concept” is appropriate.is appropriate.

““Truth telling is a dominant strategy” helps Truth telling is a dominant strategy” helps sellers maximize revenue.sellers maximize revenue.

Seller can choose to use a descending bid Seller can choose to use a descending bid structure (“Dutch Auction”).structure (“Dutch Auction”).

Auctions for Unlimited-Auctions for Unlimited-Supply (Digital) GoodsSupply (Digital) Goods

““Optimal Fixed Pricing” (OFP)Optimal Fixed Pricing” (OFP) No truthful auction (even multi-price) can No truthful auction (even multi-price) can

beat OFP revenuebeat OFP revenue ““Competitive” = Competitive” = (OFP revenue)(OFP revenue) No truthful, deterministic auction is No truthful, deterministic auction is

competitive.competitive. There exists truthful, There exists truthful, randomizedrandomized auctions auctions

that are competitive.that are competitive.

[Goldberg, Hartline, Wright ’99][Goldberg, Hartline, Wright ’99]

eBay vs. Bidders EdgeeBay vs. Bidders Edge Bidders Edge was a company that used Bidders Edge was a company that used web botsweb bots to to

scour Internet auction sites and collect information.scour Internet auction sites and collect information. Bidders Edge would post, on its website, product and Bidders Edge would post, on its website, product and

price information for goods found on eBay and its price information for goods found on eBay and its rivals.rivals.

eBay sued Bidders Edge, claiming that the company eBay sued Bidders Edge, claiming that the company trespassedtrespassed – that the bots were an unauthorized and – that the bots were an unauthorized and intentional misuse of the eBay site.intentional misuse of the eBay site.

Bidders Edge was stopped: The judge decided that it Bidders Edge was stopped: The judge decided that it did did trespasstrespass, because the search bots could disrupt , because the search bots could disrupt eBay’s system capacity. Showing that eBay was eBay’s system capacity. Showing that eBay was harmed was enough to justify an injunction.harmed was enough to justify an injunction.

However, the injunction did not prevent Bidders Edge However, the injunction did not prevent Bidders Edge from accessing eBay information using different from accessing eBay information using different means.means.

Sale of Monroe PhotosSale of Monroe Photosand Release and Release

(From February 22, 2001 WSJ)(From February 22, 2001 WSJ)

Auctioneer: eBay Premier and Butterfields Auctioneer: eBay Premier and Butterfields of SF (eBay acquired Butterfields in 1999)of SF (eBay acquired Butterfields in 1999)

Seller: Tom Kelley Studios of Ventura, CASeller: Tom Kelley Studios of Ventura, CA

Item: Five outtakes of Marilyn Monroe’s Item: Five outtakes of Marilyn Monroe’s 1949 “Red Velvet” photo shoot 1949 “Red Velvet” photo shoot and the and the negatives and the “model’s release form”negatives and the “model’s release form”

Expected price: $700K to $1MExpected price: $700K to $1M

Implications forImplications forInternet-Based BusinessInternet-Based Business

Intellectual-Property Rights Questions Intellectual-Property Rights Questions InescapableInescapable Butterfield’s auction catalog: Right to use name Butterfield’s auction catalog: Right to use name

and likeness for “trade and advertising purposes”and likeness for “trade and advertising purposes” CMG Worldwide (which represents Monroe estate): CMG Worldwide (which represents Monroe estate):

Will go after anyone who uses “those images in a Will go after anyone who uses “those images in a commercial fashion”commercial fashion”

Potential limits to eBay scopePotential limits to eBay scope Previous sales of high-end photos, prints, and art Previous sales of high-end photos, prints, and art have “fallen flat.”have “fallen flat.” Can eBay be more than a “hugely successful … Can eBay be more than a “hugely successful …

online flea market”?online flea market”?