02 February 2008

Free market in action

The greatest thing about eBay is that anyone can buy or sell any (reasonable) thing for fair market value. Every seller of a given widget is equal in the listings - big or small, fulltime or moonlighting, lots of the same widget or only one, the only sort criteria is time of auction end. Good or bad individual sellers and buyers are easy to spot due to the feedback system, which goes both ways, thereby ensuring that everyone is equal on both ends of the business transaction and that everyone will strive to be honest while their reputations are at stake. Final prices - driven as they are in auction format - are based on actual supply and demand, not what the widget maker (or group of middlemen) decides by fiat. It makes eBay a useful place to research actual fair market values. It makes eBay a great model of a working free market.

Well, all of that might soon be going away. Because eBay fears declining traffic through the site, they want to enact some new policies that will reward the established bigtime power sellers while punishing the small and new. Any community, large or small, needs to have a constant flow of new people coming in with new ideas and fresh perspectives; otherwise it grows stale and dies. They also want to enact policies that will upset the balances of feedback and transaction power in favor of the buyer. Lack of transparency is bad.

The above linked seller thinks that if eBay wants to increase traffic, they should be doing the opposite of what they plan - reward new sellers to encourage them to come into the community. Me personally, I think they should leave it alone and not try to fix what isn't broken; something might be broken somewhere, but it's not where they're looking.

On a related but tangential note, there's also some free market in action occurring between websites and coders. ScriptLance is a great place to get coding jobs, great or small, and be completely anonymous on both ends. Who you are isn't important, only what you can do is important. Payment is done via a very fair escrow system. I'm kind of hoping something like that will appear for freelance writing jobs too.


Eric said...

Two points.

First, while auctions are certainly an excellent example of free-market forces at work, they're not necessarily examples of a market "based on actual supply and demand." The first variable is the type of auction: a reserve means that price is indeed set or influenced by seller fiat. The second and more important variable is that the "auction = pure free market" hypothesis depends on all buyers and sellers being rational, which is a questionable proposition when you start talking about actual human beings. It turns out it's quite easy for price to be driven up by irrational behavior--e.g. something similar to the sunk-cost fallacy ("I've already bid $20, I might as well bid $21"), self-destructive competitiveness ("I will not lose to a sniper 20 seconds before the auction closes!"), etc.

Second, auctions as free market only work, as you note, if they're transparent. But because of the nature of online anonymity, eBay wasn't always transparent. The feedback system, for instance, is flawed since a power seller is in a position to use it to extort casual buyers.

(Yes, this is something I experienced for myself: I bought a driver CD from a bulk seller, when it arrived it wasn't what he said it was, I left neutral feedback since there was still some useful software on the disc, he slammed me with negative and tried to get me to mutually pull our ratings. Being a fan of transparency, I noted the reason I declined and added an explanation for the negative feedback to my account. Subsequently, the seller received a few more negative ratings and vanished--no doubt reappearing with a new account. So much for transparency.)

I don't know what the answer is, or if there's an answer--just because something is broke doesn't mean you have to fix it. But I would be extremely cautious about assuming that eBay reflects FMVs and take any assumptions about auctions as markets with a grain of salt (i.e. they're great models if...).

Eric said...
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Eric said...

(Corrected a line.)

To clarify a seeming contradiction between my first and last paragraphs:

Auctions are an excellent example of free market forces at work, but not necessarily excellent examples of free markets. I.e. free markets are frequently broken or flawed, which is where socialist-leaning types like myself come in. In other words, an auction can also demonstrate the problems with a free market as much as they demonstrate the strengths of a free market, depending on factors including the structure of the auction and the reasonableness of the players.

Which is much shorter than my first post, and probably what I should have written the first time. Sorry.

MWT said...

Well, an individual auction might not be a good example of actual supply and demand. However, whenever I'm trying to figure out the fair market value of something, I follow as many ongoing auctions of it as I can find. I then look for consensus. There will be some outliers, certainly, but most of them will end with the same ballpark of price. Then (if it's an item I'm hoping to buy) I make my max bids accordingly (or I buy new; sometimes new is actually cheaper).

As for the feedback. It's up to would-be new business partners to look at the info that's available to them. Someone seeing your negative feedback should be looking at why it's there - and if they do even a slight amount of digging, they would quickly find out what really happened.

Have you clicked through to see what eBay's attempting to do to solve what they think are problems with the current feedback system? Their approach will make things less transparent...

MWT said...

Upon further thought/investigating...

It used to be that the feedback system allowed you to see all negatives (or all positives) together, along with all the details. Whenever I'm scoping out a seller, the negatives are what I want to see first - when, for what, how was it resolved, did the seller handle it professionally, etc. Apparently this info has gotten a lot harder to see.

I like when all the info is laid out in front of me in a useful manner so that I can make an informed decision. I don't like when someone wants to slant which parts I see, or outright make my decisions for me. The latest round of policy changes looks like it'll be taking it even farther in the wrong direction. Which is unfortunate.

John the Scientist said...

This is akin to eBay gutting the Sherman Anti-Trust act. Fortunately, the Internet is a free market and another eBay can arise to challenge them if this keeps up. They bought a lot of the smaller sites on their way up, but barriers to entry are mostly related only to marketing, with a little bit of expense for coding and security.

Jeri said...

Actually, e-bay is moving away from supporting the casual buyer as well.

The proxy bidding system, if all parties enter their real max, tends to inflate the at machine speed to a substantial figure. This is good for the sellers, as buyers then need to go above reasonable price to win the object. It's bad for the buyer; it means that the auction sits there with the price run up until the last second, when someone swoops in and picks it up for a few dollars more.

It's my understanding that it's now almost impossible to win a bid on any popular item, like computers/electronics, without using special third party software for bid sniping - that last minute incremental bid.

Bid sniping is a relatively new development. Third party software synchronizes with eBay bid ending time, and is set up to hold your max in that system where it's non-binding. It starts feeding your incremental bids into the system at just a few seconds prior to bid closing. The thought is that this software can enable the buyer to pick off the item with minimal bid inflation - and maximum competitive advantage.

This pisses me off, and it's meant I no longer shop ebay unless I can find a good "Buy It Now" deal. I'm not interested in playing that game.

MWT said...

Woah. That I did not know, Jeri. Though I really shouldn't've been surprised considering that ad bots bombard me every time I play Diablo 2. Of course someone would've made bots to snipe on eBay.

I wouldn't place the blame on eBay directly for that, however - unless they condone it and do nothing to prevent it.

Sniping in general by real people I have no problem with. If someone wants to pay more than reasonable for an item I want, well, either they're suckers for paying more than the reasonable amount, or their amount is the actual reasonable amount.

Eric said...

I did read what they're doing to the feedback system before I posted. Yes, it makes things less transparent. But what the Sloan piece misses (when it focuses on sellers being prejudiced) is that sellers are already using the feedback system in a retaliatory way that decreases transparency. If a buyer knows a seller is likely to retaliate to iffy feedback, why should the buyer leave any feedback, or honest feedback at all?

That having been said, I'm not sure the eBay solution is a good one, and I'm not really defending it: I see what they're doing, and why. I see there's a problem. But it may be an insoluble one, or the cure may be worse than the illness.

A certain number of flaws are endemic to auctions, and some are endemic to the way the internet works: it's to be expected that eBay should suffer the compound bad with the compound good, and that may simply be something a user has to live with.

MWT said...

Sorry - I didn't mean to imply that I thought you hadn't looked before you commented. What I meant was to point out the comparison between what eBay has now (admittedly not as nice as what used to be there) and what they have planned.

Hmmm. Maybe if they just made it a requirement for sellers to leave feedback first, before buyers do? Or start counting non-feedback purchases as neutrals and put those numbers into the mix? I don't know what would be a good solution, but I'm against anything that results in a decrease of transparency.