There are several ways in which eBay creates value. Firstly, eBay allows buyers and sellers to communicate through an online forum directly. Both sides can rate one another, and the stability of the system is enhanced by the established performance standards. Secondly, buyers and sellers are guaranteed that transactions are made safely and securely (Brickley, Smith, & Zimmerman, 2016). Thirdly, transaction costs for parties participating in transactions are reduced.
One potential contracting problem that exists on eBay is customers buying damaged or low-quality products from fraudulent sellers. Due to asymmetric information, these sellers can use misleading photos or give incorrect data to attract new customers. As a result, customers’ expectations after receiving a broken item are not met. Another potential contracting problem of eBay is a buyer failing to abide by the contractual agreement and refusing to pay for the item. Also, a buyer who submitted the highest bid may not contact the seller within three business days. In such a case, a seller may start a new auction once again or find another high bidder.
To protect its customers, eBay covers most purchases under the eBay Money Back Guarantee. If an item arrives damaged, counterfeited, or does not arrive at all, the seller is given three business days to resolve the issue (“eBay money-back guarantee policy,” n.d.).
If a seller and a buyer cannot agree, a buyer can ask eBay for help. Also, buyers are encouraged to settle transactions through the PayPal system that gives insurance to protect customers if they receive not what they expected. Another way eBay addresses contracting problems is by the creation of the Feedback Forum where buyers and sellers can share each other’s selling and buying experiences.
Contracting costs comprise expenses that are associated with a specific contract and contracting activity in general (Seaman & Young, 2018). Contracting costs at eBay include insurance costs, advertisement costs, and costs of the Feedback Forum and website maintenance. It should also be mentioned that eBay incurs a cost of protection services and the residual loss. These incurred costs are considered to be a subject of concern for potential users of the service.
One could note that fraud represents a serious yet inevitable issue in the field of e-commerce. Considering the large buyer and seller base, the number of frauds to which eBay is subject is supposed to be quite massive. For the company to become one of the most trusted and well-known online marketplaces, it had to pay significant attention to addressing potential contracting problems, some of which have been discussed above. This would allow eBay to attract more buyers and sellers and thus maximize its profits.
However, it has to be stated that eBay does not have to invest heavily to eliminate all problems with fraud and misuse. Investments should be made only up to the point when marginal costs do not exceed the marginal benefit (Froeb, McCann, Shor, & Ward, 2015). Since the overwhelming market share of eBay can be explained by maximizing marginal benefit to equal marginal cost, it can be argued that the company does not overinvest.
This assumption can be reiterated by the fact that asymmetric information is an intrinsic part of any contracting problems (Brickley et al., 2016). At the same time, it would not be feasible for eBay to underinvest in dealing with contracting problems since the more buyers and sellers it attracts, the more profit it generates. If users are satisfied with the quality of service, they will continue using the website. Therefore, eBay is interested in broadening its user base by protecting customers from diverse potential problems.
References
Brickley, J. A., Smith, C. W., & Zimmerman, J. L. (2016). Managerial economics and organizational architecture (6th ed.). New York, NY: McGraw-Hill.
eBay money-back guarantee policy. (n.d.). Web.
Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2015). Managerial economics: A problem solving approach (4th ed.). Boston, MA: Cengage Learning.
Seaman, B. A., & Young, D. R. (Eds.). (2018). Handbook of research on nonprofit economics and management (2nd ed.). Northampton, MA: Edward Elgar Publishing.