Tuesday, October 20, 2009

To What Extent E-Bay Resembles A Perfect Market?

In market structure, students are often told that perfect competition don’t really exist in the real world. It is not more than an idealistic business model with many unrealistic assumptions. My students often question me the purpose of learning this topic. Rather than telling them that it is syllabus requirement, I emphasized that economists developed the model so that we can later relax the theoretical assumptions and head towards more realistic ones

In short, it exists to facilitate comparison. However, sometimes I find myself in contradiction. Although not exact, there are indeed certain businesses out there that really meet some of the assumptions.

Consider E-bay.

Is one of the best examples of perfect market. There are just too many internet shoppers who are looking for certain item. None of them have dominant buying power to influence how it is priced. At the same time, there could be tenths or hundreds of sellers selling the same item. The number of items they have is insignificant as a proportion of market. They too cannot influence how it is priced

Also the barrier of entry and exit is either very low or none. To my knowledge, an e-bay seller will have to pay certain amount of money when they display or sell online, but the amount is ignorable. As such anyone can start their business online. Also if sales are no good, the seller can just exit the market or close an account with e-bay

Third, sellers are selling homogenous goods. There are certain same items which are sold by many e-bayers


However, asymmetric information exists. It is said that buyers have complete knowledge on the price and quality of product. In reality, this is not the case. Sellers who are desperate to push for sales may provide fake information regarding the items on sale. Now, I will talk from my experience as an e-bayer myself. I do collect rare items such as Transformers robot from 1980s series. However, disappointingly I do get items which are not as prescribed by the seller. It stated the item is brand new when in fact it has turned yellowish due to lack of care or exposure to heat. The problem is payment has been made, and in ultra rare occasion will the seller refund you partially or fully

On the other hand, it is said that sellers know the best production techniques. In this case, source an item at the lowest cost possible. This may not be the case, as certain sellers order things in bulk while some not. Those who purchase inventories in bulk will be entitled to purchasing EOS and also likely to enjoy free shipping cost. As such it will be reflected in lower price. In a nutshell, even for the same item with same condition prices are highly unlikely the same

Lastly, sellers can influence the market price, depending on what they are selling. Those who sell rare items where very few have in the market, can somehow collude with other sellers and set high price. Don’t be surprised if I tell you that there are some Transformers 6 inch figurines which can fetch up to US$ 2000. In this case, oligopoly is said to have emerged. They collude in a way by sending price ‘signal’. If a seller places $2000, other e-bayers who have the same figure may take that as a signal and begin to price somewhere to that price. The first seller is said to be price leader

If you find this hard to believe, check this link:


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