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CARL:
After I finished my MBA at the Goizueta
School of Business at Emory University, I wanted to work for myself.
I wanted to take a hobby of mine and put it together with my
business knowledge. I had a
computer. I had research
capabilities. I built an
on-line business. I had a
product: The business was one in sports collectibles.
My desire to do this coincided with the rise of on-line auctions.
Touted by its originators as America’s garage sale, Ebay was
fast becoming the predominant online secondary source for collectibles
and seemed like a good place for me to tap into my target market.
Like many other vendors, I found that I could sell my stuff on
Ebay and advertise my website at the same time.
At first, it seemed efficient and powerful.
I was intrigued.
What
I didn’t realize when I started was how much I could learn about
markets and economies from this experience.
Ebay made for a nice post-graduate laboratory to understand the
social contexts of markets.
Ebay
is a great example of increasing returns, the concept of “increasing
returns” being one I credit to polymath Brian Arthur, whose
considerable accomplishments can be found on his bio page at the Santa
Fe Institute website. It
has become THE place for online exchange.
The more people who come to Ebay to buy and sell, the more
appealing buying and selling becomes on Ebay.
You can put stuff on other auction sites or classified ad sites,
but because the traffic is so much less than Ebay, you have the feeling
you aren’t reaching enough people.
So you are encouraged to use Ebay because that’s where all the
people come. But all the
people are coming because that’s where all the items are listed.
Thus, Ebay’s position becomes increasingly stronger.
The more it does, the bigger it gets, the more solid its position
becomes. You call it
circular reasoning or groupthink, Arthur would call it “increasing
returns.”
If
traditional economics were correct, there would be competitors to Ebay
who would begin to take away part of the market, particularly if their
products were comparable to or better than ebay’s.
There are plenty of disgruntled customers. Websites whose primary purpose is to facilitate complaining
about Ebay exist with many contributors posting their horror stories.
But Ebay hasn’t experienced diminishing returns.
This is, in part, because of Ebay’s dual role in the world of
e-commerce.
In
a sense Ebay is the provider of a marketplace.
It is not a “market maker” in the sense in which that term is
used on Wall Street but the creator and overseer of the physical and
procedural aspects of a marketplace.
For a market to function, it must have the capacity for buyers
and sellers to discuss terms, if only for the necessary mutual agreement
to a set of terms to be expressed.
Storefronts in downtown areas are markets.
Flea markets have booths where sellers show their goods and
buyers inspect them and sometimes make offers.
The organization called the New York Stock Exchange has a
geographic aspect, namely the location in Manhattan where producers of
financial instruments to buyers represented by stockbrokers.
When we talk about a “market” in the sense of a venue for
commerce as opposed to the sense reflective of the actions of the
participants within that venue, we mean first and foremost, a place.
It can be a place in the physical world, or it can be a
constructed or intellectual space.
So one of the players in the economy is the provider of the
place, as is the landlord, the real estate broker, the stock exchange
owner, the auction house, or the flea market manager who uses that place
for its intended purpose. Ebay
is a market, in the sense that it is a marketplace.
A number of small businesses have grown to fruition through using
Ebay.
But
Ebay is a player in the world of e-commerce.
With its forms and hidden fees and so forth, it often acts as the
umpire who both officiates the game and participates in it as a player.
Ebay isn’t an impartial provider of a place.
It is more akin to a casino manager.
At Ebay, the house always wins.
If something sells, Ebay gets a percentage.
If something doesn’t sell, Ebay charges rent for the space.
Like many stockbrokers, ebay doesn’t especially care how well
its clients make out in the course of using their facilities.
Whether “profit” of any sort is realized by buyer or seller,
the transaction fees have to be paid.
This
dual role leads to role conflict. Ebay
has been an easy target for corruption.
Because of its fee structure, Ebay is motivated to get as many
players into the mix as possible, because the more listings, the more
money Ebay makes. Ebay has
had a poor track record of keeping con artists out of the market.
Because buyers and sellers need to trust each other in order to
make the system of exchange work, any corruption in the system
undermines all of the transactions in the system.
Ebay makes money whether or not a “sale” resulting from one
of its auctions can be completed in practice, so Ebay has little
motivation to ensure that any particular transaction is successful.
Thus, horror stories of rip-offs are plentiful.
I
began to have problems with delinquent clients soon enough, and I
learned quickly that law has not caught up with the realities of online
commerce. I sent money to a
seller who said he was in Texas but turned out to have moved to New
York. He never sent me the item I purchased. I found out later by posting to several related Internet
forums that he had done this to more than one other person. Texas begged off on jurisdiction because the guy only said he
was in Texas. Florida
(where I lived at the time) and New York (where the seller had moved at
some point) said that it was California’s problem (California being
where Ebay was based). As
for the federal government investigating the matter of using the U.S.
Mail to defraud, they were apparently too busy with other projects to be
bothered. The transaction
was too small to merit my retaining compensated legal representation,
let alone travelling to California to go to small claims court.
Ebay was not helpful either.
I basically had no choice except to call it a loss and let it go.
My
only alternative was to give the guy a bad rating on Ebay’s feedback
system, which I will discuss in detail in a moment, and to warn people
in the Sports Collectibles world about him.
But by the time I was able to do that, he was long gone with my
money and several other people’s money as well.
The con game had ended and the warnings were too late.
Ebay
has a formal system available to allow buyers to provide useful feedback
regarding service and product for other buyers to read.
The rating system is one of the best features about Ebay, and it
speaks of the market place being a social system.
Buyers and sellers not only conduct transactions with each other,
they pay attention to what other people say about their counterparts in
the transactions. We ask
for recommendations in all of our transactions and sometimes are willing
to pay a higher price for someone who comes highly recommended or are
willing to forego the lowest price because of the reputation of someone
as being a bad risk.
In
addition, there are forums, bulletin boards, for people to discuss their
problems with Ebay (though little evidence exists that Ebay actually
pays attention to these problems) or their problems with specific
vendors or buyers. Within
different genres of product, online communities grow and develop social
relationships that contextualize the market.
This happens in the “real” world as well.
People are “regulars” and spend time at stores and
restaurants to the point that they become part of the experience of that
particular market.
Eventually,
however, I grew tired of online commerce and began to grow weary of the
problems I encountered. I
found myself bogged down in details I never anticipated as being part of
the process. I love the
commercial for a courier company that shows a toy football popping out
of a fax machine after someone has purchased it online.
The point of the commercial was that once the transaction took
place, shipping had to be part of the equation.
Shipping has not caught up in technological efficiency, as
distinct from the administrative kind, to online commerce.
It took longer and was more detailed-oriented than I liked.
I envisioned spending time with a hobby I enjoyed and talking
with customers who cared about the same features of the hobby that I
did. Instead, entirely too
much of my time was spent trying to find the best cardboard box in which
to ship my oddly-shaped merchandise and beating the virtual bushes for
the best available shipping deal given that I was too small a player to
get the courier companies’ full attention.
I also had to think about how many items I was willing to keep on
hand. Similar activities
rounded out the lion’s share of the everyday experience of running the
business, and I suspected throughout that my education had prepared me
for better things.
I
grew tired of the Ebay culture. The
spoilers were successful far too often in tainting the whole experience.
I grew weary of trying to figure out who wasn’t trustworthy and
in what way they weren’t and whether they had come up with any new
ways to ruin my enterprise since the previous day.
When I wasn’t successful in anticipating the swindlers, it took
a disproportionate amount of time to straighten things out.
It simply didn’t constitute a worthwhile venture for an adult.
Perhaps
the last straw was that the word “money” defied its conventional
definition within this context. Ebay
was coming up with systems of escrow and prepayment that addressed part
of the unsavory matters at hand but added bureaucratic complexity.
Lots of vendors were “credit card only” vendors to whom
checks and money orders were not acceptable.
After a while, I was becoming convinced that money wasn’t
liquid any more. Also, I
was dealing in such small amounts that I actually had people send cash
through the mail to me, which made me nervous.
I knew it was just a matter of time before someone said they had
sent cash when they had not and I would have no way to prove they had
not.
The
culture of Ebay was evolving into a hostile and distrustful culture and
I wasn’t having any fun at all.
The
prisoner’s dilemma in game theory seemed pertinent. Two guys are arrested for committing a crime.
The police do not have any real evidence that they have the right
guys, so they need one of them to confess and turn in the other guy.
They are put in separate rooms and asked about the crime.
They are told that if one of them confesses he will be given a
light sentence for his testimony and the other one will be put away for
a long time. Of course, if
both of them confess, then they will both go to prison since neither
confession will be needed to convict the other (both having admitted to
the crime). If neither
confesses, then they will both go free.
It is simple to set up the situation so that it is in each
prisoner’s individual interest to inform on the other, and the example
serves in textbooks in several subjects to illustrate how individuals
each of whom acts out of self-interest can combine to create a situation
less advantageous to the result that would have ensued had cooperation
were allowed.
Ebay
is a place that could work if everyone worked to the good of the market,
but the advantages that accrued to spoilers were and are too great for
many ebay users to resist. Thus,
acting only in one’s best interest is not enough for optimization of
global gain. The only
hindrance to someone taking advantage of such a system comes when a
general understanding of the mutual profit of keeping the system intact
is matched by action that systematizes that mutuality.
Everyone, absolutely everyone, ends up losing in the end if the
whole system breaks down. It
is true that game theory allows for a certain number of predators being
sustained within a population, but this is a tendency that arises only
to the extent that the cost/benefit tradeoffs permit it to do so.
It is also true that it is not the successful parasite which
kills its host or which simply annoys its host so much that its host
takes it between two fingers and flicks it a considerable distance away.
No matter how well I understood the potential for gain within
ebay under the rational actor model, I could no longer afford the luxury
of caring about it unilaterally. I
dissolved the Florida corporation I had formed to the end of selling
sports collectibles in the middle of the year 2000.
copyright
by Pattie Thomas and Carl Wilkerson 2002
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