Analyzing Managerial Decisions: eBay.com

1. How does eBay create value?

eBay creates value through the application of the rules of supply and demand (Brickley et al, 2006, p. 191). In offering their online auction services to its agents for a small listing fee (as opposed charging higher per transaction costs) eBay incentives these sellers to keep use their site. Realizing the potential savings for them, sellers increase their number of listings and resulting sales volume on the site. Buyers may also purchase items using eBay for free, increasing traffic and further incentivizing buyers to list their products on the site (“About Buying”, n.d.”) These activities combined to increase the value of the site by increasing the demand for the auction product and perceived quality of the service.

2. What potential contracting problems exist on eBay?

Since the time of Meg Whitman's executive leadership, multiple contracting problems have existed on eBay. For example, the nature of the contractual relationship between sellers and buyers presents a challenge. In the external business environment, agreements are generally memorialized and easily enforceable under applicable law. However, buyers and sellers on eBay enter implicit contracts during the purchase and sale of goods. According to Brickley (2006), implicit contracts are promises of performance, but are largely unenforceable (p. 331, 335). Satisfaction of the terms of the agreement instead depends on the respective party’s obligation to comply with its terms (in this case, deliver the sold/purchased product) (Brickley, 2006, p. 335). The agreements have no teeth.

Also, the nature of the principal/agent relationship between eBay and the sellers creates other contracting problems. The structure of the arrangement is insufficient to incentivize the parties to comply with their obligations. Further, as described by the Brickley (2006), “agents do not act in the best interests of principles automatically” (p. 335). Instead, eBay must find other ways to motivate the sellers to comply with their obligations.

3. How does eBay address these problems?

eBay takes multiple steps to remedy contracting problems associated with its online auctions. First, the company utilizes “The Feedback Forum” to incentivize buyers and sellers to complete their transactions honestly and quickly (Brickley, 2006, p. 334). The Forum is a place where buyers and sellers rate one another, and parties establish reputations through Feedback Scores; the higher the score, the more reliable the party (Brickley, 2006, p. 334). eBay has policies in place to prevent “feedback manipulation” and “feedback abuse” (Brickley, 2006, p. 334). The knowledge that potential buyers and sellers are likely to visit the Feedback Forum before entering a transaction motivates patrons of the site to comply with their obligations.

Also, eBay strongly encourages the parties to a transaction to pay for their purchases using another service called PayPal. According to the case study, PayPal offers $2,000 of complimentary insurance coverage for each transaction (Brickley, 2006, p. 334). Included in their insurance program is “Buyer Protection” where PayPal reimburses buyers for the full purchase price of their purchase, including shipping (“All in one”, n.d.). Also included is “Seller Protection” where PayPal protects sellers against fraudulent payments or lost items and reimburses sellers the full transaction amount (“All in one”, n.d.). At the same time, their Dispute Resolution Process enforces the otherwise unenforceable implicit contract and makes restitution to the prevailing party (“Dispute resolution”, n.d.). This is an excellent option for eBayers.

4. What are the contracting costs at eBay?

There are certain costs associated with every contract. According to Schwartz (2004), if contract costs are kept low enough, the parties may enter any form of contract (p. 2). At eBay, the contracting costs are kept relatively low, and the principal and the agent enter implicit contracts.

eBay incurs monitoring costs in the development and maintenance of its software, including the Feedback Forum. These monitoring costs are designed to prevent “dysfunctional activities” by the sellers (Brickley, 2006, 335). Outside of these activities, most of eBay’s enforcement activity is done by suspending buyers and sellers (“User Agreement”, n.d.). This further serves to keep contracting costs for eBay as low as possible.

5. 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.

eBay established a system whereby it utilizes the agent’s reputational concerns, combined with the services of a third-party (PayPal, Inc.) to work to resolve fraud and misuse in the online auctions - such as with the selling of counterfeit sports memorabilia. As described by Brickley (2006), “parties to a contract have an obligation to resolve contracting problems in the least costly manner” (p. 335). It would appear that eBay has found an efficient and cost-effective way to do so.

References

All about buying. (n.d.). eBay Inc. Retrieved from http://pages.ebay.com/help/ buy/allaboutbuying.html

All in one secure place. (n.d.). PayPal Security Center. Retrieved from https://www.paypal.com/us/webapps/mpp/paypal-safety-and-security

Brickley, J., Smith, C., & Zimmerman, J. (2006). Managerial economics & organizational architecture. New York, NY: McGraw-Hill/Irwin.

eBay user agreement. (n.d.). eBay Inc. Retrieved from http://pages.ebay.com/help /policies/user-agreement.html

PayPal dispute resolution process. (n.d.). Retrieved from https://www.paypal.com/us/webapps/mpp/security/seller-dispute-resolution

Schwartz, A. (2004). The law and economics of costly contracting. Journal of Law, Economics, and Organization, 20(1), 2-31.