May 23rd, 2002, Episode Three:  Everyday Life Economics

The weekly hunt for bargains at other people's houses is a ritual carried on throughout Canada and the United States.  Like planting in the Spring and harvesting in the Fall, garage sale season has become a part of culture and commerce.  What better way to understand markets than the most basic understandings of demand and supply that goes on between neighbors.  We spent a Saturday morning in Victoria talking to people holding garage sales and getting an idea of their expertise in marketplace economics and the social context to buying and selling material goods.

E-Bay was going to be America's Garage Sale.  Cyberspace was the new frontier of the weekly consumer ritual.  But E-Bay has grown into a complex market with much higher stakes than the front yard and it has developed a culture of its own.  This culture is becoming increasingly suspicious and hostile as more players figure out ways to break the trust needed to make such a market work.  We examine the place of social trust in commerce and how the breakdown of trust means the breakdown of commerce.  Read the transcript below.

Finally, we discuss economics of everyday life.  We make this distinction from macro-economics and micro-economics.  The rational-actor theory of economics that dominates academic and professional economics often forgets the social contexts to economic decisions.  By concentrating on the street-level decision-making and meaning-making activities in marketplaces, the ways in which the social world gives context to market decisions emerges.  



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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