How eBay creates value through security and dispute resolution

eBay

How does eBay create value?

A eBay is essentially a virtual version of renting tables at a bazaar. The owner of the bazaar brings together sellers and buyers to the same place, and for the fee of a table, in an area where more buyers are likely to shop, the seller gains a wider audience. By renting property, in this case, demanding money for the privilege of selling on eBay, eBay generates a profit.

What potential contracting problems exist on eBay?

The potential for problems are many. First of all, sellers can simply refuse to ship merchandise and disappear after receiving a payment. Conversely, buyers can refuse to pay at all after receiving the merchandise or stop payment on their checks or cancel their credit cards. Sellers can also misrepresent their merchandise to generate a higher profit and more sellers, and buyers can return damaged merchandise and demand their money back, even though they are responsible for the damage.

What are the contracting costs at eBay?

A eBay must maintain the site and provide insurance and monitor complaints, feedback on the forums, and also the types of items that are sold.

A eBay claims that it has only a small problem with fraud and misuse of the system. Does this imply that it is over-investing in addressing potential contracting problems? Under-investing? Explain.

Over-investing? Not at all. Since eBay profits every time someone becomes a member, it is in eBay's interest to create a reputation that the site is secure. Without this security, buyers would sell their goods personally online. The benefit conveyed by eBay, besides additional 'hits' from buyers, for sellers, is that it offers some security and insurance to all of the involved parties in a sale. However, there are limits to how much eBay can police the site, and to include more controls might be prohibitively costly to the website owners -- for buyers and sellers that are leery, they can always seek out other options. eBay has stricken the right balance between over and under-investing in its security controls, hence its financial and popular success.