(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 548
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CHAPTER 13 • Game Theory and Competitive Strategy 523
antiques and automobiles to Beanie Babies and rare coins. Founded in
1995 by Pierre Omidyar in an effort to sell a broken laser pointer, eBay
dominates the online person-to-person auction industry. It recently listed
millions of products for sale, including such unusual items as a Caribbean
island, 154 acres in the Catskills, and a ghost town in Nevada. In 2011,
eBay accounted for about 85 percent of all U.S. online auction sales, totalling over $60 billion of merchandise sold. On average, over 14 million
items are listed for sale at any given time.
How has eBay come to dominate the U.S. Internet auction market? Why
haven’t other Internet auction sites (such as Yahoo and Amazon) succeeded
in taking market share from eBay? The answer is that Internet auctions are
subject to very strong network externalities. If you wanted to auction off
some rare coins or stamps which auction site would you choose? The one
that had the largest number of potential bidders. Likewise, if you wanted to
bid for rare coins or stamps, you would choose the auction site with the largest number of sellers. Thus, both sellers and buyers gravitate to the auction
site with the largest market share. Because eBay was the first major Internet
auction site, it began with a large market share, and its share grew thanks to
the network externality.
To understand the critical role of network effects, look at what happened
when eBay tried to expand internationally. In China it had to compete with
Taobao, whose managers knew how important it was to gain an early market
share advantage. Thus Taobao decided not to charge sellers any commissions, so that most of its revenue was from advertising. While its revenue
was limited by this strategy, Taobao quickly became the dominant Internet
auction site in China, with a market share exceeding 80 percent in 2010.23
And eBay likewise lost out in Japan, this time to Yahoo! Japan Auctions,
which aggressively obtained an early market share lead. The strong network
effect then made it nearly impossible for eBay (or anyone else) to challenge
Yahoo!’s dominance in Japan.
Let’s return to the United States and see how eBay auctions operate. For
single items, eBay uses an increasing price auction which works roughly as
follows: Bids must be increased with minimum increments. The highest bidder at the close of the auction wins and pays the seller a price equal to the
second-highest bid plus the minimum increment by which bids are increased
(say 25 cents). So, if you bid $20 for a particular DVD and you are the winning
bidder, you will pay the second highest paid that was paid – say $19, plus the
25-cent minimum increment. The eBay increasing price auction does not correspond precisely to the auction formats described previously because there
is a fixed and known stopping time, which can cause bidders to place bids
strategically at the end of the auction.
Many Internet auctions are dominated by private-value items. (However,
because anyone can put an item up for sale, there are common-value issues—
how reliable is the seller, and are there possibilities for resale?) The privatevalue emphasis of these auctions is especially true of unique antiques that may
have considerable value to particular bidders. With private-value auctions, you
needn’t worry so much about the prior history of bidding: The bids of others
23
According to Forbes, May 3, 2011.
In §4.5 we explain how
network externalities affect
sales of a product.
