ANALYZING MANAGERIAL DECISIONS: eBay.com*

eBay operates the world’s largest online auction. In early 2008, eBay operated in 39 counties with 276 million registered users worldwide. The total value of all successfully closed items in 2007 was $59 billion with an average of $2,039 worth of goods trading on the site every second. 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 that 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.

Refernce:

Smith Jr., Clifford W.; Jerold Zimmerman; James Brickley. Managerial Economics & Organizational Architecture (Irwin Economics) (Page 350). McGraw-Hill Higher Education. Kindle Edition.

SAMPLE SOLUTION

Analyzing Managerial Decisions

Question 1

E-Bay creates value by providing an efficient online platform that allows efficient exchange of goods between millions of sellers and buyers. The company helps people to save time by making it possible for buyers to complete the purchasing process from the comfort of their homes. It also offers a safe and secure trading method.

Question 2

Some of the contracting challenges associated with eBay include:

• Selling of inferior or damaged goods by fraudulent sellers
• Misuse of the platform by trading prohibited products
• Failure of the seller to deliver a product that meets the buyer’s expectations as per the item’s description
• Non-payment and non-deliver of goods by buyers and sellers respectively
• Sometimes it is hard to determine the authenticity of the traders in advance (Smith, Jerold & James, 2016).

Question 3            E-Bay addresses the above challenges by making sure that buyers are sufficiently insured for damaged or non-delivery of goods. The company also maintains in-house fraud deterring measures as well as escrow methods to deter fraud. E-Bay also employs some of the best payment platforms (e.g. PayPal) in the online sector. Additionally, the platform takes disciplinary measures against fraudulent users which include….