UK eBay Business Strategy

T ABLE OF C ONTENTS
1. Part I ..................................................................................................................................................3

1.1 The historic factors that have contributed to eBay’s success to date....................3
2 SWOT Analysis...................................................................................................................................................6

SWOT Analysis:..................................................................................................................................................6

3 Part 2.................................................................................................................................................................7

4 Part 3...............................................................................................................................................................10

4.1 Impact of ethical issues on consumers....................................................................12

5 References.......................................................................................................................................................16

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0. E X E C U T I V E S U M M A R Y

This report deals with the topic “UK eBay Business Strategy” The report consists of

following major parts;

1. The historic factors that have contributed to eBay’s success to date

2. eBay’s competition based on the wider concept of competitor analysis

3. A discussion of importance of corporate reputation and (CSR) corporate social

responsibility in eBay’s business model

4. Suggestion for eBay’s sustainability in earnings and growth in the next 10 years using

a detailed macro and micro analysis

1 Part I

In the first part of this research I will introduce the eBay business strategies, the online
auction trends and the consumers’ response to the online auction websites.

1.1 T HE HISTORIC FACTORS THAT HAVE CONTRIBUTED TO E B AY ’ S

SUCCESS TO DATE
Founded in 1995, eBay Inc. has attracted over 200 million registered users and touts net
revenue of $8.37 billion for the year 2008 despite the economy recession. Dispersed across
twenty thousands of categories, several millions of items are listed on any given day. In fact,
(Bajari, P. and Hortacsu, A., 2004) refers to online auctions as “one of the most successful
forms of electronic commerce”.

While there are many auction web sites in existence, eBay is the largest carrying out
consumer-to-consumer (C2C) auctions. Following the format of an ascending-bid English-
style auction, bidders enter a maximum amount they are willing to pay for an item and the
eBay software automatically increases the bid to one increment above the next highest bidder
until that maximum amount is reached (Lucking-Reiley, Bryan, Prasad, & Reeves, 1999).
Said maximum amount may be entered at any time the item is available - from the time it is
listed to the second the auction ends. Using the Internet to conduct the English auction, the

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number of potential participants is greatly increased, while the costs of conducting it are
decreased (Pinker, Seidmann, & Vakrat, 2003).

No longer is a bidder trying to win an item that is only available for a matter of seconds by
outbidding the person sitting two rows behind them; they are now bidding on items which are
available ("posted" or "listed") for extended periods of time and they can have anywhere from
a day to a week, or more, to decide how much they are willing to pay and then make their bid.
Additionally, situations where there is only one item in the auction ("I have to have it because
it is the only one and I drove all night to get here") have now been replaced in the electronic
realm with listings of many homogeneous items listed at the same time ("If I don't win the
bidding on this one, I can buy the next").

Interaction between parties in eBay auctions is almost nonexistent. A seller lists an item for
bid on eBay using the interface provided, or a third-party software program. The buyer sees
the listing, engages in the bidding process, makes a winning bid and transfers money from
their account to the seller's without ever needing to interact. The possibility does exist for one
party to send a question to another party, but this is not a standard practice and is rarely
utilized.

It has been found that over 50% of the final bids are entered after 90% of the auction time has
passed, and 32% of the winning bids come in after 97% of the auction time has passed, with
25% of the winning bids come in with .02% of the auction time left (Bajari & Hortacsu,
2003). In a study of 1,051 eBay auctions, the price level was shown to "take off at the end of
the auction with the structural pattern of the bidding process being cubic (Vishwanath, 2004)
and there is a correlation between the final price of the auction and the intensity of the
bidding.

As a side note, late bidding coupled with eBay's stringent bid retraction policies
(www.ebay.com), which require an "exceptional circumstance," make it possible for a bidder
to mistakenly place a bid in the heat of the last minute of the auction which exceeds the value
of the item and then be unable to retract it (Bazerman & Samuelson, 1983). It has been
suggested that less stringent retraction polices could serve as insurance against Winner's
Curse (Harstad & Rothkopf, 1995) and that a majority of the time this phenomenon occurs
because of the last minute bidding.

Seller Variables

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There are two key seller variables this study is focusing on: the Feedback Score, and the
Percent of Positive Feedback. Both can provide information to the buyer about the seller and
be associated with risk, or the perceptual bias referenced in the framework.

Feedback Score: Not only can the name have economic value, but so, too, can the variables
associated with it (Tadelis, 2002). A number of studies have focused on the reputation of the
seller and the prevailing sentiment can be summed up as follows: "the evidence strongly
suggests that reputation matters when it comes to prices and the probability of a sale" (Brown
& Morgan, 2006) as well as the probability that a bid will even be placed (Rafaeli & Noy,
2005).

This reputation is outwardly expressed by a number on each eBay listing showing the quantity
of transactions the seller has made and a percentage of those that have been positive (as
opposed to negative or neutral). Many buyers place their trust in the feedback mechanism
eBay has in place as a viable method to "prevent opportunistic behavior" (Snijders &
Zijdeman, 2004) with the idea being that if the seller has successfully satisfied those buyers
before me, they are much more likely to complete a successful transaction with me than
someone who has no past record of success.

This feedback system is credited with allowing eBay to have such a high rate of successful
transactions (Resnick, Zeckhauser, Friedman, & Kuwabara, 2000). Houser and Wooders
focus on the association between feedback and risk, suggesting that "one of the principal
means by which online auction sites mitigate these risks is by maintaining feedback forums"
(Houser & Wooders, 2006). In a study of Pentium EI 500Mhz processor eBay auctions during
the fall of 1999, their main finding was that "bidders pay a statistically and economically
significant premium to sellers with better reputations" (Houser & Wooders, 2006).

A perception that exists is that a higher seller reputation can be indicative of excellent service
in all aspects of the transaction including "advertised service accuracy, product description
accuracy, delivery efficiency, and posttransaction communication" (McDonald & Slawson Jr,
2002). In a study of 460 auctions, it was found that".. .despite the lack of motivation for
participants to provide negative feedback, seller reputation significantly affects the price
submitted by the highest bidder" (McDonald & Slawson Jr).

Even though one buyer may never buy from the same seller again, the feedback from

them represents a reputation system "so important for fostering trust among strangers"
(Resnick et al., 2000). It is implied that there is a tradeoff between anonymity and

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accountability (Friedman & Resnick, 2001) and by telling something about yourself- be it
only that you have engaged in successful past transactions - you are appearing as more of a
trustworthy person and less as an anonymous being.

SWOT Analysis

2 SWOT A NALYSIS
In analyzing the success factors of eBay, a SWOT analysis was conducted based on the
review of literature, demographics, and competition in the area (Ferrell, 2005). This tool was
used to organize and simplify the internal and external environments contributing the success
of eBay and to better examine the benefits and challenges the auction service may face. The
strengths were developed to examine where the service would stand out among competitors,
whereas the weaknesses were obstacles that the auction service may face within its own
entity. The opportunities were projected to be areas of potential growth in the
business/auction community, yet the threats were identified as potential complications beyond
the facility’s scope of predicting. All aspects of the SWOT analysis were carefully analyzed
for the purpose of identifying strong points as well as areas identified as needing
improvement both inside and outside of the company (Ferrell, 2005).

SWOT A NAL Y S I S :
Strengths:

 Easily accessible through internet communication

 Supportive and caring professional staff in online setting

 A good, reliable reputation among its online competitors

 Lower prices and the users’ trust in online transactions

Weaknesses:

 Privacy concerns

 Limited access to the auction items

 Limited permission for interaction between sellers and byers

 Competition challenges with other online auction sites

Opportunities:

 Reach out over the globe through online access

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  Good trust among the online visitors

 Incorporate/provide other services

 Growing interest of buyers and sellers in online auctions

Threats:

 Competition (other online services such as Amazon)

 Economic downturn

 Privacy concerns among buyers

3 P ART 2
This part of the report is a critical evaluation eBay’s competition. The examination focuses
major competitors of eBay i.e. uBid, Amazon, and Yahoo and

A critical evaluation of eBay’s competition based on the wider concept of competitor analysis

Web-based Internet auctions began with the initiatives of Online sale in May 1995, followed
by eBay in September 1995 (see Lucking-Reiley (2000)). The other three major firms that
entered this market in the following years were uBid, Yahoo! and Amazon. The expansion of
internet auctions since then has set off renewed interest in auction theory and has provided
research ideas based on new auction formats. One prominent example is the introduction of
auctions with “buy prices” by Yahoo! in 1999, known as Buy Now auctions.

All the information about eBay in this section comes from the eBay website. In order to buy

or sell on eBay, a person needs to register first by providing some personal information such

as name, address and an email account. eBay uses this information to verify a person’s

identity. This reduces a person’s chance of restarting with a new record. However, it does not

prevent it. After the registration process is done, the person chooses an eBay’s identity. Other

members on eBay are only able to see the member’s ID but not any other personal

information. Finally a person receives an email message to confirm their email address

(Grund & Gutler,2006) (eBay website).

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eBay’s income comes from charging sellers (Melnail &Alm, 2002). A seller can place an item

on eBay for sale by creating an offer page. On this page the seller describes the item, specifies

a starting price, and explains the details of the sale, such as the method of payment and

shipping cost. It is the seller’s responsibility to ship the item. In addition, the seller chooses

when the auction starts and the length of the auction. A seller may add more details on his

offer page such as return policy, and they may post pictures, and so on (eBay website),

(Melnail &Alm, 2002), (Grund & Gutler,2006), (Lucking-Reiley et al, 2006).

Subsequent to each transaction, both the buyer and the seller are able to leave feedback for

each other. After May 2008, the buyer can rate the seller as a +1 (positive), a -1 (negative), or

a 0 (neutral) rating, along with a short comment. On the other hand, the seller can leave only a

+1(positive) and a one line text comment (Cabral & Hortacsu, 2005), (Grund & Gutler, 2006),

(Lucking-Reiley et al, 2006), (eBay website).

eBay measures the reputation of the user in two ways; the percentage of positive feedback

ratings and the feedback score, and the difference between the number of positive feedbacks

and negative feedbacks. The user’s profile contains all feedback points and comments that are

left by other partners with whom the user has had previous transactions. The profile is

available to public (Melnail &Alm, 2002), (Cabral & Hortacsu, 2005), (Resnick et al, 2005),

(eBay website) On the top of the auction page, the feedback score and the percentage of

positive feedback ratings are automatically displayed next to the seller’s ID. By clicking on

the feedback score, a bidder can access the seller’s feedback profile, where more information

is available about the seller’s reputation as well as comments that the seller has received from

other members in the past (eBay website).

From February to May 2008 eBay was changing its feedback policies. According to eBay, the

previous feedback system did not prevent sellers from retaliating against negative feedback

from buyers (eBay website). “Today, the biggest issue with the system is that buyers are more

afraid than ever to leave honest, accurate feedback because of the threat of retaliation. In fact,

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when buyers have a bad experience on eBay, the final straw for many of them is getting a

negative feedback, especially of a retaliatory nature" (Bill Cobb, president of eBay North

America).

The main changes in eBay’s feedback system are as follows. Since February 2008, sellers and

buyers are allowed to earn one feedback point regardless of the number of transactions

between the same trading partners. If a seller has more than one transaction in the same week

with the same buyer, then the seller can get only one feedback point from the buyer. The

feedback score of seller would increase by one if the seller gets more positive feedback points

than negative points. It would decrease by one if he gets more negative feedback points than

positive ones. And it would be the same if the number of positives is equal to the number of

negatives ones, while the buyer’s feedback score would increase only by one point (eBay

website).

Since May 2008, only buyers are permitted to leave negative, positive or neutral feedback for

sellers, while sellers are only allowed to leave positive feedback. According to eBay, this rule

would encourage buyers to leave honest feedback without fear from retaliation from sellers.

eBay believes that this makes the feedback system more accurate, (eBay website).

Only the feedback points that are earned in the last 12 months are used to calculate the

positive feedback percentage ratings. According to eBay, a seller’s recent feedback gives a

clearer idea about seller’s trends and patterns (eBay website).

In the new feedback system, if a member does not pay fees or has violated eBay policies, the

system would suspend the member’s account. In such case all negative and neutral feedback

left by that member would be removed (eBay website).

However, the new system does not allow sellers to give a neutral or negative feedback about

buyers. Sellers are still allowed to report any violation of a buyer. Also the system gives the

right to sellers to prevent buyers who have violated eBay’s policies from bidding or buying

items. (eBay website)

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There is no change in the feedback score. eBay still uses the same method to calculate the

score (all positive feedback points that a member earns in a lifetime minus the negative

feedback points that are earned by member in lifetime).

4 P ART 3
Castka, Balsarova, Bamber, and Sharp (2004) explained that one of the ethical

decisions in all businesses involves the amount of corporate resources to devote to social and

environmental causes. Social and environmental issues fall under the general heading of

corporate social responsibility (CSR). The concept of CSR is a subset of general business

ethics and embraces “a vast array of concepts traditionally framed as environmental concerns,

public relations, corporate philanthropy, human resource management and community

relations” (Castka et al., 2004, p. 141). As an umbrella term, CSR includes various issues and

causes that include economic, legal, ethical, and discretionary commitments of resources

(Carroll, 1999). The individual causes under the general heading of CSR each have supporters

and proponents with differing views on the level of resources required from businesses. These

supporters can and do disagree on appropriate levels of expenditures from a business for a

specific cause or issue (Heal, 2005). In fact, disagreement exists on whether or not a company

should participate at any level in CSR activities that do not directly produce profits for the

business (Carroll, 1999; Lantos, 2001; Social, Environmental, & Ethical [SEE] Potential,

2008). In opposition to the profit-first approach, Agle, Donaldson, Freeman, Jensen, Mitchell,

and Wood (2008) argue that caring about and considering all stakeholders’ interests in a

business is more moral than the singular interest in profit maximization.

CSR has become an international subject for discussion and debate. The Commission

of European Communities (2001) defined CSR as “a concept whereby companies integrate

social and environmental concerns in their business operations and in their interactions with

their stakeholders on a voluntary basis” (p. 366). The World Business Council for Sustainable

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Development (2001) defines CSR as, “the commitment of business to contribute to

sustainable economic development, working with employees, their families, the local

community and society at large to improve their quality of life” (p. 6). In cooperation with the

United Nations Environment Programme (UNEP), the Global Reporting Initiative (1997)

focuses attention on corporate reporting of business activities that move toward improving

economic, environmental and social performance (Ballou, Heitger, Landes, & Adams, 2006).

Each of these international organizations provides support for businesses to be involved in a

variety of CSR activities beyond those normally considered by a for-profit enterprise. As a

summary of the international ideas, CSR is a corporate commitment to social activities and an

integration of social concerns into business operations and plans.

High profile corporate scandals and media focus on the misdeeds of prominent

business executives emphasize the subject of business ethics and the general responsibilities

of businesses and businesspersons. Enron, WorldCom, Global Crossing, Adelphia, Royal

Ahold, AIG, HealthSouth, Freddie Mac, and Fannie Mae are among those companies

receiving public media coverage for ethical transgressions. In a commentary on one of the

companies, Bendell and Cohen (2006) observed that “the stark trajectory of Enron stood out

as the iconic embodiment of all that CSR seeks to be the antidote to” (p. 6). While debate

exists on Enron representing the most egregious case, the point is clear that unethical actions

and negative public image stand in contrast with the general concepts of CSR. Much open

discussion and scholarly discourse has occurred and is occurring on what constitutes

appropriate actions of businesses and corporate organizational leaders. The discussions

emphasize the many and varied opinions about ethics and the proper roles and actions of

businesses and the business leaders.

4.1 I MPACT OF ETHICAL ISSUES ON CONSUMERS

Ethical judgments have been extensively scrutinized in marketing. The majority of this

exploration has been “practitioner-oriented” (Treise, Weigold, Conna, and Garrision 1994, p.

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59) or focused solely on ethical judgments within an organization (e.g., laczniak 1983; Mayo

and Marks 1990). Several ethical decision-making models have been developed theoretically

describing the decision-making processes marketing managers employ to resolve ethical

dilemmas (e.g., Ferrell and Gresham 1985; Hunt and Vitell 1986; Jones 1991). Most of the

ethical decision-making models revolve around Rest’s (1986) four basic components which

are making a moral judgment, engaging in moral behavior, recognition of a moral issue, and

establishing a moral intent (e.g., Ferrell and Gresham 1985; Hunt and Vitell 1986; Jones

1991; Trevino 1986).

Jones (1991) model illustrated how individuals combine their personal norms with an

evolution of the probable outcomes associated with alternative solutions when faced with

making an ethical decision. However, Jones (1991) extended the model to incorporate the

characteristics of the moral issue itself, which he termed moral intensity. This issue-related

variable presented the idea that when faced with an ethical situation an individual’s judgment

and decisions vary depending on the intensity of the situation.

Although these decision-making models focus specifically on the decision-making

process of a manager’s moral behavior, the researcher assumes that consumers progress

through the same processes when developing their judgment of a company’s ethical behavior.

Chonko (1995, p. 1) stressed that consumers have trouble evading such issues as in the

opening scenario stating, “Today, it is difficult to pick a newspaper or magazine that does not

contain some story about questionable business and marketing behavior.” Yet, little research

has examined ethical judgments of marketing behavior form consumers’ perspective,

motivating calls for research focusing on this issue (Kolkes and Kamins 1999; Hansen 1993;

Singhapakdi, Kraft, Vitell, and Rallapalli 1995). Hansen (1993, p.9) stressed the need for such

research, commenting the research that has been done concerning consumers’ perception is

“either outdated, used a convenience sample of students as consumers, or examined issues

other than consumers’ perception of marketing ethics.”

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 Early research investigating consumers’ perception of marketing ethics dealt with

identifying what type of behavior consumers judged as unethical (e.g., Dornoff and

Tankersley 1975; Sturdivant and Cocanougher 1973). Not until the 1990’s have researchers

began investigating consumers’ ethical judgments, what influences the judgments, and its

impact on consumer behavior. Yet only a few have taken into consideration the exchange

relationship between a buyer and seller (Bejou, Ennew, and Palmer 1998; Lagace, Dahlstrom

and Gassenheimer 1991).

While eBay is not the only company acting in such manners, eBay’s presence in the online

auction websites plays an important role in the consumers’ reaction. Gundlach and Murphy

(1993) argued that ethics plays a vital role in the success of exchange relationships. Theories

of relationship marketing predict that the level of trust and commitment between a consumer

and a company impact evaluation processes (Garbarino and Johnson 1999). The ethical

strategies of eBay are very simple and transparent. In every auction, the consumers have the

choice to view the product and offer their bids so, if their bids are higher, may win the

product. Similarly, the ethical values of eBay are not much complicated as in the real world

where industry has to consider environmental issues. However, the only matter of concern for

the eBay is the protection of its consumers’ privacy. Hence, there is strong need of

consumers’ privacy protection.

Part 4

In 1995 eBay was launched as an online auction. Today with millions of items available on

eBay, it has become one of the largest internet auctions. The eBay reputation system allows

buyers and sellers to rate each other after each transaction. The system keeps records of all

feedback left by previous trading partners. Access to this information is available to all

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participants in the marketplace. That makes eBay a rich environment to study the effects of

seller’s reputation on the auction’s selling prices.

Since buyers in online auctions are not able to test and see the item, they depend on

information that they get from sellers about their items. The reputation of the seller is the only

available source to buyers about the honesty of the seller. Sellers in most cases do not ship the

items until they receive payment. Several economists have studied the effects of seller’s

reputation on auctions’ selling prices. Melnik and Alm (2002) used data from auctions of

1999 mint condition $5 U.S gold coin. The average price of these items was $ 32.73. The

results showed that the buyer is willing to pay more to sellers with higher reputation.

However, the impact on the price was very minor. Houser and Wooders (2005) examined the

effect of reputation on prices of Intel Pentium III 500 Mhz auctions on eBay. They found that

bidder reputation has no effect. While seller reputation matters, it is not significant.

In May 2008, eBay changed its feedback system.

eBay’s income comes from charging sellers (Melnail &Alm, 2002). A seller can place an item

on eBay for sale by creating an offer page. On this page the seller describes the item, specifies

a starting price, and explains the details of the sale, such as the method of payment and

shipping cost. It is the seller’s responsibility to ship the item.

In addition, the seller chooses when the auction starts and the length of the auction. A seller

may add more details on his offer page such as return policy, and they may post pictures, and

so on (eBay website), (Melnail &Alm, 2002), (Grund & Gutler,2006), (Lucking-Reiley et al,

2006).

From these improvements in its system and the interrelationship between buyers and the
sellers, it is expected that eBay will continue to grow in the next ten years.

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