Ebay: Value Creation and Contracting issues

EBay is the world's largest online auction. In late 1999, the service listed over 2,000 categories of items from sports memorabilia to automobiles. In total, eBay hosted more than 2.5 million auctions a day. Sellers pay a few dollars to eBay to list their items. They provide a description of the item, photographs, the minimum acceptable bid, accepted forms of paymnent, and other relevant information. Bidders submit electronic bids over the Internet. After the auction closes (auction usually last several days), the high bidder receives an e-mail/ The high bidder must contact the seller within 3 business days to claim item as well as arrange for payment and delivery of the item. eBay provides other support services.

The Feedback Forum is a place where eBay users leave comments about each other's buying and selling experiences. If you're a bidder, you can check the seller's Feedback Profile easily before you place a bid to learn about the other person's experience with previous buyer's. If you're a seller, you can do the same with your bidders.

Every eBay users is covered by insurance at no additional charge under the terms of eBay's program. If a buer pays for an item and never receives it (or receives the item, but it was less then expected), eBay rimburses the buyer up to $200, less a @25 deductible.

SafeHarbor, eBay's safety staff, investigates alleged misuses at eBay such as fraud, trading offenses, and illegally listed items. Potential resolutions include things like banning a person from future trading on eBay.

Buyers and sellers can use an escrow service in transactions involving expensive items. eBay's escrow partner, j-Escrow, holds a buyer's payment and sends it to the seller only after the buyer has inspected the merchandise and gives approval. Sellers have the same opportunity to inspect and approve a returned item before the buyer gets a refund.

1. How does eBay crate value?

2. What potential contracting problems exist on eBay?

3. How does eBay address these problems?

4. What are the contracting costs at eBay?

5. eBay claims that it has only a small problem with fraud and misuse of the system. Does this imply that it is overinvesting in addressing potential contracting problems? Underinvesting? Explain.