Confronting the Challenges of Asymmetry of Information and Competition: The Rise of eBay

Confronting the Challenges of Asymmetry of Information and Competition: The Rise of eBay

Mikhail Ion Melnik (Kennesaw State University, USA)
Copyright: © 2015 |Pages: 15
DOI: 10.4018/978-1-4666-8459-1.ch015
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During its history, the largest U.S. consumer-to-consumer online platform, eBay, had to overcome two major obstacles: Asymmetry of information and competition from Yahoo Auctions. This chapter examines two of the mechanisms used by eBay that may account for the company's success story: the seller's rating mechanism and the insertion fee structure. The first of these mechanisms seems to have played an important role in addressing the problem of asymmetry of information in consumer-to-consumer online commerce. In addition, the eBay rating may have served as a barrier to entry for competing platforms in the consumer-to-consumer online commerce. The second mechanism appears to have aided eBay in its competition with Yahoo Auctions in the U.S. online auction market.
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Online Auctions and Importance of eBay

Online commerce (often referred to as ecommerce) is a relatively young phenomenon that developed in the 1990’s and fortified its position in the first decade of the XXI century. Despite its short history, ecommerce has already produced its own well-known brand names. One such widely recognized name is eBay. In the U.S., online auctions have effectively become synonymous with the eBay brand. The ease of adaptability of auctions to online commerce further contributed to the growing popularity of eBay. However, the history of online auctions has not been free of competition, and serious competitive battles indeed took place before eBay became synonymous with online auctions in the U.S. market. In fact, it was following the closing of Yahoo Auctions in the summer of 2007, that eBay’s hegemony over the U.S. online auction market was finally sealed. In addition to competition, online businesses operating in the consumer-to-consumer space also faced other challenges that included asymmetry of information. The industry and particularly eBay were successfully able to overcome this challenge and turn it into a shield against potential competitors.

Much like all online commerce, eBay is a relatively young firm, making its success story even more exciting. Indeed, eBay has come a long way since its debut on Labor Day of 1995. In 2013, eBay reported that the total volume of merchandize sales on its U.S. website (excluding vehicles) reached $30.403 billion a year (eBay, 2014). For comparison, according to the most recent estimates by the U.S. Census, the size of the U.S. online retail sales in 2011, the last year for which the data is currently available, was around $193.904 billion (U.S. Census, 2013). A mere comparison between these numbers highlights the relative importance of eBay.

Although eBay is associated with online auctions, the company does not act as the seller in any auctions listed on its website, but merely serves as a platform for its users. Its customers are the individuals and businesses who wish to sell their items on eBay. In turn, eBay serves as a platform in consumer-to-consumer and business-to-consumer ecommerce.

In its short history, eBay has had to overcome two important obstacles: asymmetry of information and competition with Yahoo. These two obstacles received significant attention in economic literature. The proceeding discussion examines each of these two aspects of eBay’s experience and highlights the unique and creative ways in which eBay has met these challenges.

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