What’s Wrong With eBay? It’s Simple Economics

What’s wrong with eBay?  Before I answer this question, you should download this Wharton case study by Dr. Eric Clemons of The Wharton School, University of Pennsylvania.  Dr. Clemons is one of the world’s most renowned experts on information economics, and this case study is currently being taught at Wharton this semester.  It goes into great detail discussing eBay’s current challenges, and I believe you will find it insightful.

Okay back to the question…  What’s wrong with eBay?

Suddenly, there is so much discussion about what is going on with eBay.  Buyers seem to be shopping elsewhere.  Sellers are complaining about deteriorating economics and looking for new, more profitable sales channels or going out of business altogether.  Third-party service providers are reading these tea leaves and choosing to relieve their dependence on eBay’s success and more importantly, the risks of falling victim to eBay’s policy team.  The media is reporting continued fraud and emerging customer service problems.  Designer brands and manufacturers are suing eBay over massive counterfeit sales and intellectual property abuse.  Key managers are leaving for greener pastures.  New competitors are emerging in a big way.  Analysts are waking up and asking real questions.  Investors don’t seem to be buying, and in many cases, they have been selling.  A lot of my eBay customers have been calling me lately asking for an opinion for what is going on.

First of all, let’s review a few facts.  These are not my opinions, but rather, real data points.

So, what is wrong with eBay?

Ugly seller economics?
Yep.  That is for sure, but that isn’t the core problem.  That is the net effect of the core problem.

Rampant fraud?
Some folks think that if Rob Chestnut and the eBay Trust & Safety department could simply catch all the bad guys, then everything on eBay would be fine.  I believe that is a little naive.  Mr. Chestnut is never going to catch all the bad guys or even a fraction of them, but I am sure he and his team are working hard and having lots of successes.  The problem with this line of thinking is that it is a losing proposition. It reminds of that game we have all played at the county fair, "Whac-A-Mole". You will never hit all the moles, and when you get too focused on one mole, you miss all the others.  Chasing bad guys has its place, but you need a more fundamental solution.  I also believe fraud will always exist, and so you need to concentrate on a more scalable, effective mechanism.  More on that later.

Not enough buyer demand?
Many eBay experts and Wall Street analysts are crowing about a lack of buyer demand, and they will cite some of the statistics mentioned above and the story can be quite convincing.  Well anytime you have too much risk and uncertainty in a marketplace, you will have less buyers.  The risk averse buyers will seek safer harbors.  I guess that should be pretty obvious, but I can tell you that many eCommerce "experts" don’t fully grasp this basic economic concept (I can talk more about this another day).  Too little buyer demand is certainly a problem, but again, it is the result of a more fundamental problem.

Many believe that the marketing department simply needs to do a better job of telling consumers about eBay.  Marketing is obviously not the problem.  Every human on the planet with a computer or TV knows what eBay is as well as its value proposition.

Too much seller supply?
eBay’s Bill Cobb recently announced fee increases to "reset the balance of the eBay marketplace". A balanced supply and demand is critical to a healthy marketplace, so I don’t fault the line of thinking.  Also, auctions are more profitable to eBay, so okay, I guess that is fine.  My worry is that eBay management believes that raising fees is a way of pushing low quality product off the platform when in reality, I think it does just the opposite.  If you don’t understand the core problem I am about to diagnose for you, then it is easy to think this might be a good strategy.  It is a common perception in the eCommerce world that market failures are largely due to bad inventory and that if you charge no or low fees, you invite bad inventory.  That is only true when buyers can’t tell which inventory items are the poor quality items and which items are the pristine items.

That brings me to eBay’s core problem.

eBay’s core problem is simple economics!
Informationadvantage_1 More specifically, eBay’s core problem is the existence of information asymmetry and the lack of an effective seller certification and performance guarantee mechanism.  Information asymmetry exists when one party has more or better information about the product than the other party.  In eCommerce and on eBay, the seller clearly has an information advantage over the buyer, and this is information asymmetry.

In 2000 and 2001 while working on the business plan for buySAFE, I talked to thousands of people about what I viewed as an inevitable problem for eBay and eCommerce, information asymmetry and the lack of an effective signaling mechanism.  My belief then was the same as it is now, stringent, meaningful seller certification and strong, comprehensive performance guarantees will enable eBay and eCommerce to be successful channels for small and medium-sized merchants.  Without it, small and medium-sized businesses won’t be able to optimize profits, and eCommerce marketplaces will become Markets for Lemons (You should read my blog post on "What’s a Market for Lemons?" in order to see an illustration that defines what I am talking about here.)

While working on the business plans, every professor, classmate, venture capitalist, eBay manager, expert and entrepreneur rolled their eyes at me, and then they lectured me on how eBay and PayPal had clearly solved the problem with feedback ratings and back-end buyer protection plans.  That was six years ago, and given the facts I have just described above combined with buySAFE’s incredible growth over the last two years in eCommerce, I would suggest that the information asymmetry problem was and is real, and somebody on eBay’s management team needs to recognize this sooner versus later. 

Have you ever seen the famous New Yorker cartoon by Peter Steiner from 1993 where the two dogs are sitting at a computer?  One of the canines says to the other with a nice smile, "On the Internet, nobody knows you’re a dog". Yep.  That is so true, and on the Internet, buyers have difficulty telling who is a professional, legitimate merchant as well.  The key to dealing with information asymmetry? Signaling

If effective signaling mechanisms are the key to solving eBay’s information asymmetry problem, then what is the most effective signaling mechanism?  Again, absent an established, recognizable merchant brand, I believe stringent, meaningful seller certification and strong, comprehensive performance guarantees provide the strongest possible signal of professionalism, trustworthiness, and reliability.  Obviously, that is what buySAFE does when it bonds sellers and transactions, but I will address this in more detail in a future post.   I should also note that the Professional eBay Sellers Alliance (PESA), eBay’s largest, independent seller organization, has been a strong proponent for stringent, meaningful seller certifications as well.

When information asymmetry isn’t addressed, what happens in the long-run?  As I mentioned above, economists believe that markets can eventually become "Market for Lemons".  Again, you should check out the following post for details on "What is a Market for Lemons?".

Ecosystems are fragile.  They can completely unwind when they fall out of balance.  Any biologist will tell you that this is true.  eBay’s marketplace is an ecosystem, and we need to recognize that the core challenge to this ecosystem and the eCommerce ecosystem in general, is information asymmetry.

I hope this is a helpful commentary.  I want to end by saying that I am eBay’s biggest fan, and I hope it can sustain its amazing run.  We will all be better off if eBay can succeed.

There are lots of information sources for what is cooking at eBay and in eCommerce, but if you want unique insights into what is really driving behavior and marketplace activity, I highly recommend the following three blogs:
buySAFE blog by Jeff Grass
eBay Strategies blog by Scot Wingo
AuctionBytes blog by Ina Steiner

One new source of information is from Randy Smythe from GlacierBayDVD. Randy is one of the nicest, smartest guys I know (and a pretty good golfer too), and when his eBay business went under, I was very upset about it.  Randy is roaring back and sharing his terrific insights with us in his new blog, and I highly recommend it.

I welcome your thoughts and insights as well, so please feel free to weigh in with your comments.

16 thoughts on “What’s Wrong With eBay? It’s Simple Economics

  1. Another good argument for bonding – with the current business model – there are too many moles to whac!
    Read the interview with Rob Chestnut. He focuses on phishing and eBay/PayPal are known as the two most “phished” brands.
    Anyone following the phishing expeditions sees a monthly increase in the amount of it going on. At least if you are to believe the Anti-Phishing-Working-Group.
    Every month, there are more moles to whac.
    Not exactly sure what the solution is – but the problem isn’t going away and appears to be growing.
    There has also been negative feedback that eBay is slow to provide the necessary info to law enforcement to go after the crooks and is leery of cooperating with other security departments when their goods are discovered on the site.
    Might not be their fault – there are probably too many moles to whac.
    In the end – it is the consumer that suffers – then the business itself (due to a lack of confidence).
    Another good argument for bonding – which might bring back the confidence of the customer.
    Bonding makes fraud harder to commit, instills confidence in the consumer and gives the security department the ability to focus their efforts (fewer moles to whack).
    To solve a problem – you have to get ahead of it and change the reasons it is occuring.

  2. Steve’s analysis is wrong. Information asymmetry is a normal usually beneficial market phenomenon, which does not explain Ebay’s self-inflicted problems. Saying that ‘the seller clearly has an information advantage over the buyer’ is giving Ebay an excuse not to be held accountable, while it really is. If Woda’s statement were true that seller’s had an information advantage on Ebay, in real economics it would mean that the Ebay sellers would fetch HIGHER prices than elsewhere, while he correctly states that Ebay sellers fetch 20-50% lower prices. One contradicts the other.
    What is really happening (and I suggest you focus your research on that as is badly needed) is that we have a corporation (Ebay) which does not understand the core reason of its initial success and is actually working against itself, so against that core advantage, instead of enhancing it and using it as leverage against competitors. In otherwor ds: Ebay is its worst enemy now.
    What is that unique core advantage Ebay’s working against, its initial most critical success factor?
    It is its unique ‘laissez-faire capitalist’ character, like no one ever created before. Ebay was the free market liberating minds and money, the place where finally sellers and buyers could meet and trade without virtually any limits. There were no governments suppressing its trade with their suffocating regulations, fines and property seizures. Fearless sellers and buyers entered a world where anything was possible and prices were created without any third party beyond Ebay trying to get an undeserving (non-value adding) piece of the trade.
    Thanks to Ebay caving in to foreign and local governments, politicians, buyer and seller pressure groups, etc. their free world has become a world of chains, a dictatorship with mob rule, with especially the sellers being chained in so many ways and increasingly every day, that it is almost better to trade in a dictatorship like China. Sellers have been so restricted that they are almost employees of Ebay, not free traders anymore.
    If Ebay wants to get back on track it will have to acknowledge the reason of its initial success and openly commit to it, to its ‘laissez-faire world’ for 100%. Then it will have to select and train the staff to do the job to make it happen once more, and bigger and better.

  3. Your point about ‘eBay prices are a fraction of what sellers can get on other channels’ is right on target. When I talk to new potential wholesale suppliers, I find that many of them have very restrictive policies against selling on eBay. Sometimes their policies name eBay by name, other times they just refer to ‘online auction sites’. In most cases, they’re perfectly OK with selling their product on other online channels like your own website or even Amazon. Wholesale suppliers are well aware of this ‘bargain basement phenomenon’ and don’t embrace it.

  4. The Economics of eBay – What’s Wrong?

    I just found Steve Woda’s blog on eBay, buySafe and eCommerce. I consider myself fairly knowledgeable about eBay and I found a number of facts that I did not consider.I knew that the main reasons behind my eBay business dive…

  5. Pat Mason

    I think there’s another phenomenon here which is something I’ve observed at flea markets. It starts out with a bunch of individuals selling their extra stuff. It’s like a giant garage sale, but better because you don’t have to drive around looking for signs.
    Then you notice that some seller’s faces are looking pretty familiar – they’re there week after week. Pretty soon these sellers have a permanent location on the grounds. More of these type of sellers begin populating the grounds until now you have mostly permanent sellers and lots of new imported junk for sale. They pretty much crowd out the non-professional individuals.
    It’s no fun to go and buy anymore, so you stop attending and begin driving around looking for signs again.

  6. Jeff

    Interesting article. However, it is my belief that (in general) ebay suffers from a management vacuum or even several of them into which falls the nearest empty space.
    More specifically, I believe ebay is constantly on the short side in their real competition for my (the seller’s) precious time.
    Firstly, the ebay process is painfully inefficient. However, that could be palatable if management included in their focus the great need not to waste my (the sellers) precious time.
    Secondly, this principle is grossly violated every time the company makes another dive to the left or dive to the right. Ebay operates like a tacking sailboat whose skipper operates without a compass, sextant or chart. Instead, the captain and crew “react” to wind and waves and can usually be found well off course (but going fast). Thinking sellers can and should figure out how to leverage the ebay platform to maximize their opportunity. This can be done with high integrity and excellent/fast service. I have found that to be especially true with my (independent) website and I seldom need to go back and do things over.
    AND THAT’S THE KEY: On my website I can keep “building”, “growing” and “moving forward” not always looking over my shoulder to find Meg pulling another boneheaded idea out of the “vacuum” between someone’s ears.
    I can no longer justify the precious time required to redo my ebay strategies every time the ebay “team” comes up with another bad idea and executes it as only they can.
    My online business began on ebay at 100% of sales. Today it’s at 85-95% of sales at a significantly operating margin, gross profit, net profit AND, most importantly in the efficient use of my time.
    If the people who run ebay fully understood what they had and have increasingly squandered, they could have called the shots a lot differently. Instead they created the vacuum which now bears other brand names they can only ban.
    What a shame.
    BTW, I still sell on ebay and I’m much too smart to “dive” to the left with all the others. I simply raised all my prices and shipping rates and hit the yes button to accept “best offers” to help guide the buyers to free shipping on my website. That one was easy.

  7. ebay gal

    It’s funny that you praise Randy of glacierbaydvd. You do realize that with a feedback % of 98.8 and over three thousand negatives, Randy was part of the “information asymmetry” problem, right?
    It’s strange to reference him in this post. I wouldn’t have purchased from glacierbaydvd if they were the only DVD seller on eBay and I needed DVDs to stay alive.

  8. Thanks for your comment eBay Gal. Your perspective is interesting, but I believe you may be reading a bit too much into my references to GlacierBayDVD.
    My blog post references GlacierBayDVD twice. The first time, I point out that GlacierBayDVD, once one of the largest sellers on eBay, went out of business in 2006. That is not exactly a glowing endorsement of GlacierBayDVD.
    My second reference to GlacierBayDVD points out that Randy is a nice guy, a good golfer, and most relevant to my point, that you should read his blog in order to get a very different, yet interesting perspective on the eBay world. I have personally found his blog posts to be fascinating, and I recommend that folks give it a quick read as well.
    As Otto von Bismarck once remarked… “A fool learns from his experience. A wise person learns from the experience of others.”
    I believe that if you are an eCommerce merchant, it would be a big mistake not to learn everything you can about the mistakes that others have made in your business… especially the fatal mistakes. If you don’t learn from their mistakes, you might just repeat them.
    Thanks for your comment, and good luck with your business!

  9. This certainly makes a good point. I’d like to see the response of others on this topic. Makes interesting reading.
    ebooks with resale rights

  10. Jesse

    As a 9 year veteran of Ebay, I appreciate the tainted “ecosystem” analogy. It is cluttered, suspicious, uncomfortable and clumsy on Ebay. The “congratulations” item submitted page pictures of silly girls waving money around and the Paypal login page idiot on a bare green carpet indicate the lack of experience and sophistication at the world largest online store. Foreign buyers with multiple IDs filing repeated non-rect claims, buyers switching parts, lack of customer support… This web site is a new fresh breeze. My sales $ are down 50% in 2 months. Tresurector

  11. Peltz

    Brilliant analysis Steve! This is an absolutely perfect assessment of what is going on with my business on eBay. You are so right, and I wish the folks at eBay would wake up to the new realities of their current situation.

  12. Laura, an eBay PowerSeller

    Steve I just came across your amazing article you wrote on eBay — to the point, well done. For years I lived as a die hard love eBay seller and user until one day the nazis came for me to (no pun intended, but being Jewish it is appropriate). Its amazing that nobody’s really taken their tactics further to show how many good sellers they have harmed along the way, they have literally no customer service but are the judge and jury (paypal too) for every transaction that conspires. Doesn’t matter if you show them proof of shipping, or anything else, they are like Godzilla running around stepping on everyone insite. For me, I have decided to try my hand at Tias and Goantiques while I build my new website. Thank you again for such an insightful article. Laura.

  13. David

    It really is a sad situation at ebay these days. I hear that google may have an online auction site active later this year, Id be willing to give that a shot at that time.

  14. cokeman1964

    I had a small store on Ebay for about two & a half years, the first year things worked out so so. I made several purchases through ebay only to learn that they were not up front with their pricing & I eneded up getting billed for more than I was actually selling. Trying to get my overcharges back from ebay was pure hell, they kept passing me off to different dept’s, it took almost two months to get my money back. My second year my store was hacked into on three separate occasions with people listing items in my store that I didn’t own. I alerted ebay & thye made me out to be the bad guy, when it was their servers that got hacked, I had to go right up to the presidents office of ebay to get my store back & restored on all three occasions. Ebay would not accept the fact that it was there servers that had been hacked. I learned afterwards that ebay does not use any type of firewall service to block these hacking attacks. My last 6 months with ebay they decided to bring in a new pricing scheme, which only upset the majority of ebays customers & clients on both ends, the pricing failed miserably to bring any balance to the problems that still exist to this day. But as usual Ebay & their one sided views thought they were right & we the paying store owners should either put up or close up shop & move on.

  15. Ben

    Economics aside…
    Many years ago, ebay was a place where amateurs used to buy and sell.
    The fees were low and everyone had a chance.
    Then came the snipers and then the sniper software.
    Then it became impossible to see who was really bidding on auctions and
    also it became impossible to contact the other bidders. (I met a whoe lot of interesting and like minded people that way from all over!).
    Recently, the best funstion of all, the woldcard search has beeon discontinued.
    Now, people like me, who bought heaps of stuff on ebay in the old days (upt 2010), are trying to sift through tons of imitations, new cheap chinese stuff etc. The search function is basically useless for complex searches and the results are constantly clouded by cheap foreign rubbish. I have gicen up because it isn’t fun and I can’t find stuff I am looking for.
    Honestly, ebay desrecves to go under as it has lost its roots and its way.
    Pity really 😦

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