Causes for the Changing Online Market Trends - Research Paper Example

eBay--Transition From Auctions to Using Posted Prices The market of eBay has been dominated by auctions as a way of market mechanism, as eBay has been the trend setter for this mechanism. Auctions bring the buyers and the sellers to the eBay platform following competitive procedure. The eBay auction initiative has changed millions of prospects into customers, making their shopping experience cherishing and interesting (Wei and Lin 1). Nevertheless, off late trend has shifted from open auctions to posted-price. Proprietary eBay data indicates how eBay sellers highly prefer posted-price sales to open auctions. From sellers’ perspective, this preference for posted-price over auctions is endogenous. There is ambiguity over market mechanisms’ behavior; how participants are affected and sales materialize, as the trend of posted-price is initiated by sellers. The reason of this compositional changeover in the products being sold cannot be explained as evolving or causal. Rather profits from auctions started decreasing. Buyers also started showing disinterest in the auction market mechanism besides the shrinking margins of the sellers that prompted a shift to the trend of posted prices. Einav et al. (1) find the reason of reducing margins more important for the changeover in online market design from open auctions to posted price. Although the shift has taken place but still auctions are preferred in certain sales by the online sellers; these are prevalent, as sellers prefer them to posted prices for distinct items sales. The market of eBay connects sellers and buyers on the online platform, presented through its highly interactive website. It is a market with no fixed prices for ever and information is available at just the click of the mouse; both buyers and sellers are bargaining continuously for a better transaction from their own perspectives. eBay is the perfect example of selling goods through auctions, which it has been doing since 2001, propelling its growth through the development of proxy bidding. It facilitates buyers offering a maximum bid while the computer answers to third parties’ bids up to this maximum. This selling design minimizes transaction costs as bidders’ offline or physical presence in actual time is not required for taking part in ever changing market scenario for auction bidding (Einav et al. 1). Figure1 above indicates the past trend till the current scenario, starting from Jan. 2003 till Jan. 2012 of online commerce, which has transformed greatly, but showing a turn against auctions due to reducing revenues since Jan. 2008. As stated in the figure, the sudden decrease in the share of active listings can be related to the decision in September 2008 to permit “good till cancelled” posted price listings, which resulted in the reduction to below fifty percent the share of listings and transaction quantum towards auction sales. The sudden downfall of 2008 to some extent indicates a shift in eBay policy that made posted price listings cost-effective and let posted price listings to remain visible for lengthier times. The figure does not show a range of other sales designs like “hybrid” auctions that permit a pre-emptive posted price bargain, or posted prices with an alternative to make a reducing offer. These show a decreasing share of listings and transactions (Einav et al. 1). Figure 2 below indicates a similar design for Google searches involving the terms "online auctions" and "online prices." This is very interesting market design not for the reason of the quick growth of online commerce, but for the selection of sales mechanisms, and competition between sales mechanisms (Einav et al. 1). Sufficient data is available to differentiate opposing causes for the changing online market trends, as taken from eBay. One reason of this shift can be corroborated from the changing composition of online sellers or in the products being showcased online. eBay example, at least, does not corroborate the shift from auctions to posted prices; rather the shift has happened within the routine groupings of sellers and goods to be sold. The next probability is a shift in consumer tastes and choices (Einav et al. 1). Other extended reason attributed to reducing trend of the auctions as a market design by eBay has been the reducing price finding benefits of auctions across time because making comparison between different prices has became easier, or another associated reason is that higher competition has reduced profit margins of the sellers (Einav et al. 2). There is sufficient empirical data over decline of auctions. Earlier, auctions were the ideal medium for selling distinct and idiosyncratic items, particularly by fresh sellers. Decline in auctions cannot be attributed to compositional shifts, as there are very small changes in the selling pattern of various cohorts of sellers. It reveals that rather than the compositional change in sellers, it was the shift in sellers’ incentives that has significantly affected the market design change. Data reveals that eBay’s marketplace turnover was 9.3 billion dollars in 2001, which reached to above $67 billion as of 2012. Distinct items sold on eBay used to be like its first item, which was a broken laser pointer. In the year 2002, eBay started permitting sellers to name items at posted prices selecting the “Buy it Now” (BIN) format. Figure1 above reveals that the changeover from auctions to posted prices was smoother (Einav et al. 4). Two interesting features emerge from the eBay marketplace related to pricing mechanisms, one is the presence of both formats at a time – auctions and posted prices, and the second is what type of sellers choose auctions and why. No doubts, the reasons behind are visible. It is due to increasing competition online between companies like eBay that facilitates buyers to compare prices in no time, prompting sellers to choose the posted price option because the online retail is highly competitive market. Another reason is that customer demand for idiosyncratic items is relatively little. Who would like to bid for unique items like a broken laser pointer? Demand of distinct items is therefore, nominal only. Distinct and vintage items can carry higher price tags, and are preferable to be sold through online auctions. Because items of daily use, such as clothing, accessories, and cosmetics are sold by many sellers competitively, their prices are posted. There is no logic in selling them through auctions, as sellers won’t succeed in selling them. On the contrary, if rare items of historic importance are listed through auctions, people of special trait and taste or pursuing a hobby of collecting distinct items would buy them, such as the spinning wheel of Mahatama Gandhi could fetch a seller millions. A seller would prefer and certainly put such an item on auction, setting a minimum bid, but any used item otherwise won’t even get sold through posted price. This is the difference between items to be auctioned and items to be posted price. Unique items have no duplicate, such as a lock of teen heartthrob Justin Bieber’s hair won’t have a duplicate. Data reveals that in the year 2009, eBay selling of individual listings was nearly 75 percent through auctions relatively to 57 percent via duplicate sales (Einav et al. 6). It derives that market for auctions is still there but it is on the reducing relatively to posted-prices marketing of goods. Trade-offs involved in using auctions versus posted prices and the decisions over the selection of prices depends on various indicators, including decreasing doubt over an items worth, increasing retail competition, and higher demand for comfort; these indicators support posted prices. Nonetheless, it resembles the basic data design, indicating a strong mechanism that auction listings might have increasing sale possibilities but reducing prices. An analysis of the returns to auction and posted price sales at various touch points presents the problem of calculating for variations in the kinds of items sold by auction and posted price, and the kinds of sellers doing the online sales. Products listed by auction can be very different from products listed by posted price, even after taking into consideration their approximating traits. Possible complications include the ranking of the free-text product detail, the appeal of posted images, and the brand the seller is known by. Besides, other than a limited set of items with catalogue identifiers, data on item peculiarities is missing; only seller-selected listing title and an almost rough kind of divisions have information tags (Einav et al. 2). A ubiquitous trait of eBays platform is that sellers randomly list the same product, either at the same time or across time, while changing their sale format or other pricing indicators. Such examples from the dataset of eBay sales from 2003 (when auctions were the highly prevailing sales design) to 2009 (by which time posted prices had lagged behind the prevalence of auctions) offers an “apples-to-apples” comparison when a seller lists the same product by auction and by posted price. It shows the growth of a large "auction discount". In 2003, auction prices were on average within five percent of similar posted price sales. By 2009, the discount had increased to above sixteen percent. The price reduction cannot be explained by sellers reducing their auction fixed prices. Actually, reserve prices generally increased in comparison to similar posted prices. Besides, a reduction in success rates for both market formats was observed, but not differentially, across the time (Einav et al. 2). Seller incentives play a decisive role, as they use their trait of flexibility in setting their posted prices or reserve prices. This can be measured by changing prices within sets of similar combinations of sale possibility and sale price that can be realized with varied mechanisms. The measures can be explained as “listing-level” demand curves. A comparison of the measures from 2003 and 2009 reveals that listing-level demand has come down for both formats, but higher fall has been seen for auctions. This shows that sellers seem to be more favorable to price posting format over auction, specifically in categories such as Collectibles, Jewelry and Clothing that exhibit comparatively differentiated items. The high in listing competition appears to have played a greater role in categories like Electronics and Computers, which have observed a similar change in favor of posted pricing (Einav et al. 2). Einav et al. (3) find other evidence related to changing buyer demand, as compositional shifts in the group of buyers do not appear to have caused the higher demand for posted prices. Nevertheless, at any touch point, there is considerable heterogeneity in the group of buyers. Buyers shopping hugely on eBay seem to participate increasingly on auctions for better bargains after bidding. This indicates that customer diversion could be a cause of sellers keeping up with auctions format for items that are not specifically unusual. From this outlook, the logic for auctions becomes less about price and nearer to the use of coupons and other promotional tactics observed in brick and mortar markets. Other explanation for hybrid use of sales formats could be platform fees and the fast pace of market adaptations. Einav et al. (4) mention other academicians for analysis of the trend for price posting, which includes Hammond (2010)) for stressing particularly on the selection between auctions and price posting in the sale of compact disks online. As per his analysis, sellers with an increased opportunity cost prefer posted prices and seller heterogeneity can answer for the prevalence of both the mechanisms. Bauner (2011)) analyses the use of auctions and price posting on the eBay platform for the sale of Major League Baseball tickets to note that not only opportunity costs, but heterogeneity over buyers, widely divided into “fixed price lovers” and “neutrals,” help reason the prevalence of auction and fixed price sales. In a different analysis of Major League Baseball tickets that centers on changing price setting, Sweeting (2012)) states that auction prices are generally lesser to posted price levels. Lastly, Ariely and Simonson (2003)) and Malmendier and Lee (2011)) analyze auction prices comparative to posted prices in the past to realize that auction prices can be unnaturally high, and debate that bidding pattern can forestall the outcomes of standard economic models. Regarding improving the trading organization of eBay (IIMK 545), it should focus on widening it further to secure its share from increasing competition. Since 1999, the marketplace for online shopping started getting competitive with not only startup firms but firms like Yahoo and Amazon, having huge user bases. eBay needs to focus more on expanding the core business of both market mechanisms, auctions and posted prices. It should be willing for more strategic acquisitions. There is still huge potential in the market for antique items for selling them through online auctions for reaping high margins. Actually, equal attention needs to be paid on both market mechanisms for improving the organization’s market mechanism. Works Cited Einav, Liran., Farronato, Chiara., Levin, Jonathan., and Sundaresant, Neel. “Sales Mechanisms in Online Markets: What Happened to Internet Auctions?” April 2013. 29 January 2014. . Gopalkrishnan, J. and Gupta, V.K. “eBay: The World’s Largest Online Marketplace”- A Case Study.” Conference on Global Competition & Competitiveness of Indian Corporate. 29 January 2014. . Wei, Zaiyan and Lin, Mingfeng. “Auction vs. Posted-Price: Market Mechanism, Lender Behaviors, and Transaction Outcomes in Online Crowdfunding.” November 2013. 29 January 2014. . Read More