eBay

http://http://www.adage.com/news.cms?newsIwww.adage.com/news.cms?newsIdd=36528=36528

Group Ten Presents:Group Ten Presents:http://http://

www.adage.com/news.cwww.adage.com/news.cms?newsIdms?newsId

=36528=36528

Emory Redd Abby Weaver George Chambers

eBay Outline: Group 10eBay Outline: Group 10 Consumers Budget Lines : WeaverConsumers Budget Lines : Weaver Law of Diminishing Marginal Utility: Law of Diminishing Marginal Utility: WeaverWeaver Advertising: WeaverAdvertising: Weaver Opportunity Cost: WeaverOpportunity Cost: Weaver Monopoly: ReddMonopoly: Redd Human Capital: ReddHuman Capital: Redd Financial Markets: ReddFinancial Markets: Redd Supply/Demand of eBay: ChambersSupply/Demand of eBay: Chambers Marginal Revenue: ChambersMarginal Revenue: Chambers

History of eBayHistory of eBay

Founded in 1995 by Pierre OmidyarFounded in 1995 by Pierre Omidyar

Bills itself as “The world’s online market Bills itself as “The world’s online market place”place”

““Our mission is to build an online Our mission is to build an online marketplace that enables practically marketplace that enables practically anyone to trade practically anything anyone to trade practically anything anywhere in the world”anywhere in the world”

1998: 300,000 users; and $200 million in 1998: 300,000 users; and $200 million in gross merchandise salesgross merchandise sales

2002: 42,000,000 users; $9 billion gross 2002: 42,000,000 users; $9 billion gross merchandise salesmerchandise sales

Does eBay chanDoes eBay changge consumers e consumers budget lines?budget lines?

A decrease in the price leads to either a rightward rotation of the budget line or causes the budget line to rotate upward, leaving the horizontal intercept unaffected.

Utility and Marginal Utility and Marginal UtilityUtility utility is the utility is the

pleasure or pleasure or satisfaction obtained satisfaction obtained from consuming from consuming goods and services.goods and services.

Marginal utility is the Marginal utility is the change in utility an change in utility an individual enjoys individual enjoys from consuming an from consuming an additional unit of a additional unit of a good.good.

As consumption As consumption rises, so does total rises, so does total utility.utility.

Marginal utility falls Marginal utility falls as consumption as consumption rises, indicating that rises, indicating that each additional unit each additional unit provides less provides less additional utility additional utility than the previous than the previous unit did. unit did.

Law of Diminishing Law of Diminishing Marginal UtilityMarginal Utility As consumption of a good or service As consumption of a good or service increases, marginal utility decreases.increases, marginal utility decreases.

Survey Results: satisfaction and usage will Survey Results: satisfaction and usage will increase as eBay becomes more popular.increase as eBay becomes more popular.

To the Consumer:To the Consumer:* time spent * time spent searching for an itemsearching for an item

* time spent waiting * time spent waiting for the bid to endfor the bid to end

* shipping costs* shipping costs

* mailing time* mailing time

To eBay:To eBay:

* eBay relocated to * eBay relocated to Delaware in April Delaware in April 1996 to avoid the 1996 to avoid the high taxes that high taxes that California was California was charging. All of the charging. All of the money spent money spent moving could have moving could have been used better been used better elsewhere.elsewhere.

Opportunity Cost

In 1999, eBay paid In 1999, eBay paid AOL $79 million to AOL $79 million to promote its auction sitepromote its auction site

After which eBay After which eBay reported $24.6 million reported $24.6 million in cash earningsin cash earnings

In 2002, sales and In 2002, sales and marketing expenses for marketing expenses for eBay totaled $73.1 eBay totaled $73.1 million, or 30% of net million, or 30% of net revenues.revenues.

The actor on the eBay The actor on the eBay commercial resembles commercial resembles Jeff Bezos, Amazon’s Jeff Bezos, Amazon’s CEOCEO

Amazon.com CEOJeff Bezos

Singing Dancing"Do It eBay" GuyAdvertising

Human CapitalHuman Capital

Employees have both General and Employees have both General and Specific Human CapitalSpecific Human Capital

General Human CapitalGeneral Human CapitalKnowledge or training beneficial to Knowledge or training beneficial to

many firmsmany firmsSpecific Human CapitalSpecific Human CapitalKnowledge or training beneficial to Knowledge or training beneficial to

only one firmonly one firm

Human CapitalHuman Capital

ExampleExample

Meg Whitman, CEO of eBayMeg Whitman, CEO of eBay

Previously a Hasbro marketing Previously a Hasbro marketing director director

This is This is Specific Human CapitalSpecific Human Capital

Human CapitalHuman Capital

continuedcontinued

Meg Whitman, CEO of eBayMeg Whitman, CEO of eBay

Economics degree from Economics degree from PrincetonPrinceton

MBA from Harvard MBA from Harvard

These are examples of These are examples of General General Human CapitalHuman Capital

Is eBay a Monopoly?Is eBay a Monopoly?

eBay has a few direct eBay has a few direct competitorscompetitors

-Yahoo Auctions-Yahoo Auctions

-Amazon.com-Amazon.com

-Many specialized Auction sites-Many specialized Auction sites

Cost of entry into the eBay’s Cost of entry into the eBay’s market is low.market is low.

Is eBay a Monopoly?Is eBay a Monopoly?

“ “We expect competition to We expect competition to intensify in the future as barriers to intensify in the future as barriers to entry into these channels are entry into these channels are relatively low, as current offline and relatively low, as current offline and new competitors can easily launch new competitors can easily launch online sites at nominal costs using online sites at nominal costs using commercially available software”commercially available software”

- eBay 2002 annual report- eBay 2002 annual report

Is eBay a Monopoly?Is eBay a Monopoly?

eBay’s competes directly with eBay’s competes directly with anyone who offers shop-at-home anyone who offers shop-at-home serviceservice

eBay competes indirectly with eBay competes indirectly with any retailer of similar goodsany retailer of similar goods

Is eBay a Monopoly?Is eBay a Monopoly?

Characteristics of eBay’s market:Characteristics of eBay’s market:

A heterogeneous productA heterogeneous product

A downward sloping demand curveA downward sloping demand curve

A large number of participantsA large number of participants

Easy entrance and exitEasy entrance and exit

It’s a Monopolistic CompetitionIt’s a Monopolistic Competition

Financial Financial MarketsMarkets

Stock prices and demand curvesStock prices and demand curves Shares of stock are scarceShares of stock are scarce The supply of eBay shares is fixedThe supply of eBay shares is fixed

PP

ss

QQ

Financial Financial MarketsMarkets

The demand shifts to the left or rightThe demand shifts to the left or right

P P s s

dd

QQ

Closing price (4.14.03) : $87.74Closing price (4.14.03) : $87.74

52-week range:52-week range: $49.25 - $91.41 $49.25 - $91.41

5 Year range: 5 Year range: $4.21 – $127.50$4.21 – $127.50

What causes the demand curve to What causes the demand curve to shift?shift?

Financial Financial MarketsMarkets

Causes of demand curve shiftCauses of demand curve shift

Analyst ReportsAnalyst Reports

Annual and Quarterly ReportsAnnual and Quarterly Reports

In practice, market price In practice, market price fluctuations are not traceable to fluctuations are not traceable to any one thingany one thing

The Law of SupplyThe Law of Supply

As P increases, As P increases, so does Qso does Q

Directly Directly proportionalproportional

P

Q

S

The Law of SupplyThe Law of Supply

The supply The supply continues to continues to increaseincrease

More and more More and more sellerssellers

Ceteris Paribus Factors Ceteris Paribus Factors for Supplyfor Supply Input PricesInput Prices Number of SellersNumber of Sellers Expectations of sellersExpectations of sellers Prices of Alternative GoodsPrices of Alternative Goods TechnologyTechnology

A Shift of the Supply A Shift of the Supply CurveCurve

change in change in nonprice nonprice determinants determinants

Shift to the right Shift to the right increases supply, increases supply, shift to the left shift to the left decreases supplydecreases supply

P

Q

S S1S2

The Law of DemandThe Law of Demand

As P increases, Q As P increases, Q decreasesdecreases

Inversely Inversely proportionalproportional

P

Q

D

The Law of DemandThe Law of Demand

With increasing With increasing reserve prices, reserve prices, the demand for the demand for eBay products eBay products decreasesdecreases

Ceteris Paribus Factors Ceteris Paribus Factors for Demandfor Demand IncomeIncome Number of consumersNumber of consumers Expectations of buyersExpectations of buyers Prices of related goodsPrices of related goods TastesTastes

A Shift of the Demand A Shift of the Demand CurveCurve Change in Change in

nonprice nonprice determinantsdeterminants

Shifts to the right Shifts to the right increase increase demand, shifts to demand, shifts to the left decrease the left decrease demanddemand

P

Q

D

D1

D2

Supply + Demand = Supply + Demand = MarketMarket Together, supply Together, supply

and demand and demand form a market form a market with an with an equilibrium priceequilibrium price

The market for The market for eBay is eBay is imperfectly imperfectly competitivecompetitive

P

Q

D

SE

EquilibriumEquilibrium

Once equilibrium Once equilibrium is established, it is established, it will remain there will remain there unless an external unless an external factor changesfactor changes

When things When things change, they change, they either effect either effect supply or demand supply or demand resulting in a new resulting in a new equilibriumequilibrium

Example of Equilibrium Example of Equilibrium ChangeChange An increase in An increase in

supply causes supply causes new equilibrium new equilibrium with higher with higher pricesprices

P

Q

S

D

D1

Profit MaximizingProfit Maximizing

What is the main What is the main goal for a firm goal for a firm like eBay?like eBay?– To maximize To maximize

profitsprofits

Two kinds of Two kinds of ProfitProfit– Accounting ProfitAccounting Profit

Total revenue Total revenue minus accounting minus accounting costscosts

– Economic ProfitEconomic Profit Total revenue Total revenue

minus all costs of minus all costs of productionproduction

Which Profit is More Which Profit is More Important?Important? Understanding economic profit Understanding economic profit

helps better understand the firm’s helps better understand the firm’s actionsactions– If you understand economic profit, it If you understand economic profit, it

is possible to understand why eBay is possible to understand why eBay uses price discriminationuses price discrimination

What output level What output level Should eBay Operate Should eBay Operate At?At? Where marginal Where marginal

cost equals cost equals marginal revenuemarginal revenue– Where the MC Where the MC

and MR curves and MR curves intersectintersect

– Operating at this Operating at this level will level will maximize profitsmaximize profits Output

DOLLARS

MC

MR

2.7 Billion

Price DiscriminationPrice Discrimination

eBay also uses eBay also uses price price discrimination to discrimination to maximize profitsmaximize profits– eBay incurs the eBay incurs the

same costs for same costs for everything they everything they post to be sold, post to be sold, but charge but charge different rates to different rates to the sellersthe sellers

ConclusionConclusion

eBay has become the number one eBay has become the number one auction site. It has 5.6 million auction site. It has 5.6 million registered users and more than 12 registered users and more than 12 million items for sale at any one time. million items for sale at any one time. In 1999, they moved $2.7 billion in In 1999, they moved $2.7 billion in merchandise revenue which nearly merchandise revenue which nearly doubled Amazon’s $1.4 billion. eBay doubled Amazon’s $1.4 billion. eBay has been on its way up since they first has been on its way up since they first started in 1995. It has successfully started in 1995. It has successfully reached the top and continues to grow.reached the top and continues to grow.

Any Questions?Any Questions?