eBay is an example of an online auction market (OAM). All OAM\'s reduce transact
ID: 1132570 • Letter: E
Question
eBay is an example of an online auction market (OAM). All OAM's reduce transaction costs (TCs) by collecting buyers and sellers in a central location, thereby reducing search costs. eBay has refined the OAM experience in several ways go beyond the mere linking of buyers and sellers.
Provide a hypothetical example of an unregulated online auction market. How would it work?
What problems would your unregulated market have (Adverse Selection & Information Asymmetry)? How might these problems destroy value for both customers and sellers?
Explanation / Answer
Provide a hypothetical example of an unregulated online auction market.
Online Auction market is a service provided via internet to the prospective buyers and sellers where sellers provide competitive offers and buyers enter competitive bids simultaneously.
Let us assume a company name wemediate as an online auction platform.
How would it work?
Wemediate will work in the following way—
Bringing buyers and sellers together
Payment method
Arbitration-
What problems would your unregulated market have (Adverse Selection & Information Asymmetry)?
Adverse Selection
This is a result of information asymmetry. In such a situation one of the contracting parties has more information than the other side thus giving an edge to the person over another who doesn’t have that specific extra piece of information.
Almost all the transactions that occur have this flaw. On an online platform, its scale increases as all transactions and dealings are made in the virtual world.
E.g. a seller selling his guitar may not disclose the real number of years he used the guitar and how many times it broke down. If it still looks new he will state that the guitar is just a new one.
Buyer will make the decision on the basis of this information and the picture provided of new-like guitar. It will be later the buyer will realize that he has been fooled.
Moral hazard
It occurs when one of the contracting party enters into a risky transaction because of its knowledge that the cost of risk or failure will be borne out by the other party.
In the above example, seller of guitar knowing that he is violating the policies of wemediate will make a deal as he knows that it is the buyer who will suffer later on.
How might these problems destroy value for both customers and sellers?
This will create a sense of insecurity among the consumers. They will not be willing to make the use of platform and in case they do will remain apprehensive of the deal to suffer from these flaws. This affects the decision-making ability of the consumers and will be reflected in price of bidding and offers. Competitive deals will not be materialized and as a result, the core aim of the platform to provide best deals will be defeated.
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