FreeBay? When eBay Works Well

Last week, my All Hail eBay article explored a theory that eBay is one of the three worldwide phenomena that keeps prices relatively low in this arguably inflationary environment we find ourselves in.

Those three phenomena are:

  1. China
  2. Wal-Mart (China’s outlet mall)
  3. eBay

I suggest that, other than government intervention which might in the short term falsely keep prices in check, these Big Three items impact the world’s prices today and put tremendous downward pressure on prices we pay as consumers.

(For those who wrote to me saying China is not as free as it ought to be and steals American jobs, I certainly agree with the first half of your assertion. That doesn’t change China’s impact and we must consider that worldwide impact as it affects our futures in unimaginable ways for good and for bad.)

Today I want to look at how eBay offers all of us a nice market experience — similar to a free market in so many ways.

Next week, I’ll visit the drawbacks of eBay that make eBay a very nasty market indeed. That will be the longest article because eBay has lots of problems. For free-market lovers (and what regular LewRockwell.com reader isn’t?), eBay can be devastating from a market perspective. I’ll let my cynicism run wild while I explore the bad things about it.

I’ll preview that final conclusion now, a week in advance — I love eBay. If you don’t sell some things on eBay every once in a while, you’re leaving money on the table. In spite of its problems eBay has helped make us wealthier and eBay can do the same for you too. But go into eBay with your eyes open or you’ll constantly experience disappointment.

Disclaimer

As I explained last week, I am no Economist so what I write will be clear and understandable. (I might be inaccurate but I’ll be understandable, unlike the Economists who fail on both counts.)

The Market Size

eBay is the "world’s largest garage sale." Unlike items you might sell at your local garage sale, yard sale, or swap meet, you’ll have potential buyers from every corner of the world scouring through your goods. The massive population of buyers, and the relatively-low price of shipping (depending on service and speed) removes most geographical boundaries. The people looking at your stuff at the local swap meet might number 100. The number can reach over a billion for those looking at your eBay auctions.

Buyers complain that eBay’s size and globalization makes it impossible to find a deal. I disagree. It makes it more of a challenge but it doesn’t make it difficult.

If you’ve experienced frustration in losing to other bidders, you need to locate items you want whose auctions end in the middle of the night when others are sleeping. Also, look for misspellings of words in titles (one of the best tools for this is Adam Ginsberg’s Misspell Generator due to its huge feature list and low price). Most important, use a bid sniping service that will drop into an auction and bid for you in the final seconds, bidding up to whatever amount you approve in advance. Every veteran eBayer has their favorite snipe service. I happen to think BidNip.com is the best on the planet, not only because BidNip.com gives you free snipes just for trying it but also because you don’t pay if they don’t win for you, they’ve been in the business a heck of a long time, and BidNip.com doesn’t require a credit card number just for trying their service.

With the tools I suggested above, you can actually buy items on eBay and turn around and resell them on eBay and make a profit. Such arbitrage might not be as plentiful as it used to be but it’s not as difficult as you might think.

My life currently revolves around selling. (It’s my wife who is the buyer…) As a seller, I’d rather have a potential market of billions than 100 at my yard sale. Generally, all things being equal (I just had to say that), the more bidders I have the higher my prices can be. It’s those darn competitors selling next to me on eBay that makes things more difficult.

Price Is Everything

Are markets efficient? Efficient Market Theory suggests that market participants know and act on all information related to their market the moment that information is available.

One opposing theory is the Random Walk Theory that says market prices are random and are not affected by factors such as knowledge of prices, supply & demand, or past performance (historical prices).

The Efficient Market Theory at first appears to be closer to the truth, logically, than Random Walk Theory, but both have problems and a lot of them. Most markets are somewhere between those two extremes. (Oops, sorry for sounding like an Economist. I’ll try to watch that.)

On eBay, I suggest that prices are extremely efficient because price information is immediate and accurate. At any point in time, you can find the lowest price for any item. Some "white noise" exists that affects searches to keep this from being perfect but knowledge of price is close to perfect at any given time on eBay.

This near-perfect price information forces constant downward pressure on prices. If I’m selling something that others are selling, I know that all buyers are privy to the fact that somebody else is selling it lower than I am. So it behooves me to offer competitive pricing every time I list an item.

That doesn’t always mean I must have the lowest price. My prices can be higher:

  1. If I’m perceived to be a seller with a better track record than many others (I am).
  2. If my shipping costs are lower than others’.
  3. If I want to take a chance on getting a rushed buyer who doesn’t spend time looking elsewhere
  4. If I offer some kind of bonus.

Therefore, just like free markets, the low price does not always win the sale. But it’s the availability of that price information that generally requires sellers to keep prices low or offer benefits that garner higher prices.

eBay’s Not All About Auctions

If you’re fairly new to the eBay concept, you might not know that eBay is not just an auction site. I’ve heard — but I doubt the high percentage — that as many as 40% of all eBay listings are fixed-price. These are often called Buy It Now (BIN) auctions. They aren’t auctions at all. I might list a DVD for $19.00 in a BIN format. Nobody bids. Whoever comes up with $19 and clicks to buy my DVD "wins" that DVD.

With BIN auctions (that aren’t really auctions), the stated price is critical. You are tossing out a price you’ll take in the midst of hundreds and possibly thousands of competitors. If that doesn’t humble you up quickly, nothing will. Adam Smith’s invisible hand works wonders on slapping me right out of the buyer’s corner if I cannot beat my competitors on price or shipping or service of some kind. I might still make a sale, but it will often be to an eBay newcomer. I sell to new eBayers all the time, but there is a slightly higher risk because their payment history is unknown and the odds are such that I’ll have to deal with a non-payer slightly more often than when dealing with buyer with better eBay track records.

eBay allows you to combine auctions into a hybrid format where an item has a Buy It Now price and a starting bid amount. I might offer a DVD for $19 in a Buy It Now as well as make it an auction with a starting bid of one penny. If someone clicks to buy it for $19, the auction ends. If, instead, someone bids one cent, the Buy It Now price goes away and the auction stays active until the auction’s time limit (typically exactly 7 days) expires and the high bidder (or very smart sniper!) wins.

History Often Repeats Itself

The eBay feedback system is loved and hated, often by the same people. When an auction ends, no matter what format that sale takes on (BIN, etc.), the buyer has 60 days to leave positive, neutral, or negative feedback for the seller. The seller has 60 days to leave positive, neutral, or negative feedback for the buyer.

The more feedback you get, the more eBay transactions you’ve been involved with and the more buyers and sellers know about your eBay performance.

As a seller, I generally leave feedback the moment a buyer pays for an item. If it’s a newcomer to eBay, I might wait for a check to clear and other extenuating circumstances might require a wait before I leave feedback, but generally I leave it the moment the proper amount is paid. This means I’m taking a chance. Because buyers don’t often leave feedback until they receive an item. If I leave positive feedback, the buyer can leave negative feedback just because he’s a jerk. If he wants.

That doesn’t usually happen.

But hasn’t the buyer done 100% right the moment the payment clears? And if I don’t do my job as a seller, for example if I send damaged merchandise or if I didn’t describe the item accurately, I deserve something for that misrepresentation. Now to be fair to the sellers, most of whom want to treat their buyers very well and honestly (repeat business builds empires), I hope that if a buyer finds any problem with the transaction, that buyer tells me the problem and gives me a chance to make it right before posting negative feedback on me.

I could go on about feedback, but it’s my goal here to present the eBay feedback system in the light of a free — or not-so-free — market. As you can see, again it’s like eBay’s near-perfect price information. Other than a few dishonest or sloppy buyers and sellers, a feedback rating comprised of the number of positive vs. negative feedbacks, goes a long way to showing a potential bidder how happy they will be with that transaction.

Before I bid on anything, I make sure the seller has been on eBay a while and has a track record. Well, that’s not completely true. One item I recently purchased with the sole goal of reselling immediately upon receiving it (a Dan Kennedy marketing course) was from a brand new seller with zero feedback. Hardly anybody showed an interest in this item because the starting bid was $99 and the seller had no track record. I knew the item could bring close to $500 so I watched it. In the final second or two before the auction expired, a sniping service (I’m sure it was BidNip.com but it’s been a few months and may have been before I learned about BidNip.com‘s benefits such as its especially strong privacy statements) bought it for me. For $151.

I was taking a chance because a seller with zero feedback is risky and deserves to get less for their auctions until they prove themselves. (We’ve all had zero feedback at one time, it doesn’t take long to build a more respectable rating.) But the auction’s wording had a ring of truth to it. The seller obviously had been to that very seminar and had gotten the tapes as a bonus to being an attendee. Maybe the seller was a good liar but I didn’t think so.

Would I have been angry if I got beat out of that $151? Certainly. But I went into it with my eyes open knowing the risk and return. I knew what the item was worth and I knew the risk I was taking. The seller shipped the seminar to me the moment he received my payment. I resold it for more than double what I paid.

Near-perfect price and seller history information can be very profitable.

Winding Down

I could go much deeper into eBay’s free market elements. I’ve only skimmed the surface. Many will write to me (and I want to hear from you!) to tell me all kinds of ways that eBay mirrors a free market. I know most of them but LewRockwell.com readers shouldn’t be exposed to too much of my writing in one sitting or they’ll sprain their brains. Understandably.

I have a feeling, however, that many of you will write and tell me all the ways that eBay is bad. A lousy service. A horrible Expensive Market as opposed to a Free Market. I welcome your comments the most. I’ll agree with most of them I’m sure.

As I said, the elements that keep eBay from being a real free market makes it a nasty market. It’s more fun to write about those problems. And I will in this series’ concluding article in a week or so. I’ll once again preview my conclusion though — in spite of its problems, I’m an avid eBay fan. I suppose it’s because of the huge amount of money it makes me. 475,000 eBayers now make a full-time living on eBay. I am close to becoming one of them. In spite of my success as an author, eBay is a lot more fun and a lot less work.

If eBay isn’t a free market, and it’s not, the near-free market aspects that I described above are enough by themselves to make me a fan.

August 16, 2005

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