Ebay’s Impact on Global Trade

How eBay has an impact on global trade. Introduction 2 What Is eBay? 3 Literature Review 12 Case Study 19 Results 25 Conclusions 27 Bibliography 28 Introduction The advent of the Internet has changed many dynamics in the ways we do things with respect to our business as well as personal lives. The near zero cost of communication and transmission the medium provides has brought new variables to the ability of people to conduct transactions in the borderless Internet world. The new global economy has created the dynamics for call centres based in various parts of the globe, as well as the ability of individuals to conduct international transactions based upon the availability of a computer and Internet connection. These technological advantages are the foundation of eBay’s existence. It provides the means, methodologies, transactional variables, currency and language, as well as common platform via which sellers and buyers are brought together in one cyber locale to purchase and sell anything from pens to airplanes. Gandolfo (1998, P 2) describes the theory of international trade as “…the causes, structure and the volume … (of goods) …which are imported… “ as well as exported and the relative effects that availability and transportability have on price as well as demand. The foregoing is viewed in the same perspective by Dixit et al (1985, P. 1) who explain the theory of international trade as being “… qualitative … (as in)… being concerned with the pattern of trade, i.e. which country will export which good”. This concerns itself with factors such as “… comparative advantage …” Dixit et al (1985, P. 1) which includes such aspects as technological differences, supplies, etc. They go on to explain that “… the other theme is more quantitative, and seeks to explain the terms of trade …” (Dixit et al, 1985, P. 1) through “… relative prices of exports and imports…” (Dixit et al, 1985, P. 1). The preceding represents the contexts in which an examination of ‘How eBay has an impact on global trade’ shall be conducted. The selection of a more simplified quantitative method is a reflection of the fact that the pattern of eBay’s trading is conducted among individual buyers and sellers based on need, desire and availability, with the aspects of production and supply as secondary factors. The preceding is because the relative nature of the trading platform represent singular or used items rather than new products and the development or creation of demand for mass production and sale, which is a foundational consideration of the qualitative approach. In order to equate the foregoing, eBay’s impact on global trade shall be examined utilizing varied theories, such as Porter’s Five Forces Model, Porter’s Competitive Advantage, the Heckscher-Ohlin Model, Factor-Price Equalization, and various components of international trade theory. eBay’s operational mode is built upon the foundations of our new global Internet technologies, as well as nearly zero cost communications, 24 hour availability, borderless platform and the ability of individuals, regardless of their business acumen, financial status, location, resources or background to trade virtually anything and anytime. The foregoing represents a unique application of the foregoing theories, thus representing an interesting example of a modern technological medium in the realm of global trade. What Is eBay? EBay is a web-based marketplace whereby a community of sellers and buyers are gathered for the purpose of browsing to buy and or sell a plethora of items ranging from toys, to clothes, and all manner of household and recreational goods to items as big as vehicles, airplanes and to items such as the current offering of a $4,000,000 USD Ramada Inn Motel located in Madisonville, Kentucky in the United States (eBay, 2006). The company was founded in 1995 by Pierre Omidyar and originally was named Auctionweb (wikipedia, 2005). Interestingly, the first item sold on that web site was a broken laser pointer that fetched a price of $14.83. Omidyar called the purchaser to confirm to him that the laser pointer was indeed broken, to which he received the response that the winning bidder was a collector or these type of items (wikipedia, 2005). The operation of the web site consists of eBay’s proprietary software and interfaces which establish a platform for users, buyers and sellers, to communicate with each other over the items up for sale through a bidding process. The company itself, is actually not involved in the interaction between the seller and the buyer, except as the medium via which the transaction takes place. eBay’s participation it limited to providing the technology, software, registration procedures, seller and buyer rating analysis and the means to conduct the transaction for a percentage of the final bid (eBay, 2006). The web site is user friendly, offering links to explain the process, how to utilize it, as well as all of the pertinent regulations, rules and procedural aspects for conducting selling as well as buying. Sellers are cautioned not to ship items until the payment established in the winning bid has been received, and conversely buyers are cautioned to read the sellers rating as established by other buyers of prior items in considering entering into a transaction. Through the utilization of what is termed ‘feedback ratings’ buyers send a report after a transaction is concluded concerning their respective experiences with that seller. This data, compiled over time, helps other buyers determine the reliability of the seller in future transactions. And while the system is of course open to abuse in first instances, eBay’s reputation with aiding buyers in legal disputes as well as the buyer protection provisions of most credit cards helps to keep these types of instances to a minimum (Kalyanam et al, 2001, P 1). EBay has taken further steps to secure the reliability of transactions through its purchase of the online payment and money transfer company PayPal in 2002 (wikipedia, 2005). The direct control over auction payment transactions provided by PayPal’s connection with eBay permits the company to retrieve monies from sellers for none delivered items as well as an additional database resource on the sellers vital personal information, such as banking account and other details to aid in prosecution, if necessary. EBay has been on an international expansion program since 1999 when it acquired the auction house of Butterfield & Butterfield (wikipedia, 2005). Since that time, it has acquired the following entities, giving it representation in the following markets (wikipedia, 2005):

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  1. 1999, acquired auction house Alando whose name was changed to eBay Germany,
  2. 2000, acquired Half.com which it integrated into its eBay Marketplace,
  3. 2001, acquired Mercado Libre, iBazar, and Lakau, Latin American auction sites to provide it with representation in that region,
  4. 2003, acquired EachNet, an ecommerce company based in China,
  5. 2004, acquired Baazee.com, and auction site in India,
  6. 2004, acquired InternetAuction Co in Korea,
  7. 2004, acquired Marketplaats.nl an auction house located in The Netherlands
  8. 2005, acquired Gumtree, which represents a network of local city classified sites in the United Kingdom,
  9. 2005, acquired Skype, an Internet based telephone call system

Today, eBay has transaction sites in the following countries (eBay, 2006)

  1. Argentina
  2. Australia
  3. Austria
  4. Belgium
  5. Brazil
  6. Canada
  7. China
  8. France
  9. Germany
  10. Hong Kong
  11. India
  12. Ireland
  13. Italy
  14. Korea
  15. Malaysia
  16. Mexico
  17. Netherlands
  18. New Zealand
  19. Philippines
  20. Poland
  21. Singapore
  22. Spain
  23. Sweden
  24. Switzerland
  25. Taiwan
  26. United Kingdom

As well as sub sites offering (eBay, 2006)

  1. eBay Motors

This segment of eBay’s web site provides sellers and buyers the opportunity to auction passenger vehicles, motorcycles, parts and accessories, trucks, boats, ATV’s, snowmobiles, scooters, aircraft, buses, commercial vehicles, race cars, campers, trailers and varied sub-categories within this genre

  1. eBay Stores

This aspect of the eBay web site contains direct affiliations with established retailers such as:

  1. Hewlett Packard
  2. CompuSource Tech
  3. 4 Video Equipment
  4. Italian Artisans Jewelry
  5. BiziPC Store
  6. Dell Computers
  7. Auto Wholesale Supercenter
  8. U.S. Postal Service Collectibles
  9. Hot Rod Clothing
  10. Railroading and Collectibles
  11. Artaholics 4 Hire
  12. A multitude of video game and video equipment retailers
  13. JPWDirect’s Jewelry and Gem Shop
  14. Eddie’s Bargain Center
  15. HalleyRus
  16. Your Swimsuit and Jewellery Too
  17. As well as a number of other retailers

The preceding represents quite a revealing look into the manner in which eBay offers buyers the opportunity to acquire not only used items, but new ones as well. This is an important aspect in the examination and investigation of the company’s influence on global trade as it opens up a new dimension with respect to what Dixit et al (1985, P. 1) explained regarding the theory of international trade as being “… qualitative … (as in)… being concerned with the pattern of trade, i.e. which country will export which good”. This aspect includes items such as “… comparative advantage, i.e. to international differences in relative opportunity costs, and then tries to explain comparative advantage in terms of differences in technologies, factor supplies, etc.” Dixit et al (1985, P. 1). This further explanation is important in that as a result of eBay offering new goods, it is facilitating new product sales as well as access to new markets through its auction platform. This impacts international trade from the perspective of ‘comparative advantage’ in that an isolated market offering a particular item which has been deemed by corporations as not justifying the cost of investment in supplying said item on a production or distribution standpoint, leaves said item to those or that company or individuals in that market to satisfy. This provides them with the opportunity to set prices based upon the limited supply, thus increasing the cost relative to demand. EBay’s new product offerings have the effect of changing this dynamic as the limited market demand for certain items is met through their new product web affiliations. Discounting for tariff, shipping and import duties, the forgoing has the potential of reducing consumer acquisition costs in such an instance. While the preceding might seemingly represent a limited application of this theory, the fact remains that the implications and opportunity for said theory to be utilized represents the important aspect. A deeper examination of David Ricardo’s (1817) theory shall be illustrated in the Literature Review.

  1. eBay Business

eBay offers business owners and entrepreneurs the opportunity to sell as well as acquire items on a singular as well as ongoing basis through this site segment. It offers ‘Purchase Protection’ up to $20,000 USD, financing and payment methods, shipping options, and importantly global resources. It provides on –line assistance in finding, bidding and buying items sold and offered on an international basis, as well as how to secure payment, along with customs information. EBay Business offers category headings for items ranging from cell phones, to laptops, office equipment, furnishings, construction items, food service and retail, industrial supply, manufacturing and metalworking and commercial trucks and real estate to list a few aspects. As explained in the preceding segment, eBay Stores, the net effect of providing these types of categories is to open up international markets to the variables of supply and demand, notwithstanding tariff and import duty costs.

  1. Half.com

This is a discount site offering video games, DVD movies, and music. Books, and more at prices ranging from 50% to 80% off retail.

  1. PayPal

EBay’s purchase of this international payments, money transfer and credit card system provided it with an internal means to aid customers of its web site control the buyer and seller transaction, as well as aid in the re-coupment of monies in the event of non performance by either party. This aspect of eBay’s operations helps to ensure trust in the process as well as serve as an additional revenue stream resulting from the transactions in this quarter. The movement of currency across PayPal’s international network that services (PayPal, 2006):

  1. Australia
  2. Austria
  3. Belgium
  4. Canada
  5. China
  6. France
  7. Germany
  8. Italy
  9. Netherlands
  1. Spain
  2. Denmark
  3. Finland
  4. Greece
  5. Hong Kong
  6. Ireland
  7. Japan
  8. Mexico
  9. New Zealand
  10. Norway
  11. Portugal
  12. Argentina
  13. Brazil
  14. Chile
  15. Ecuador
  16. India
  17. Jamaica
  18. Costa Rica
  19. Dominican Republic
  20. Iceland
  21. Israel
  22. Malaysia
  23. Thailand
  24. Anguilla
  25. Cyrus
  26. Czech Republic
  27. Estonia
  28. Hungrey
  29. Latvia
  30. Lithuania
  31. Luxenbourg
  32. Malta
  33. Poland,

has the implications of having financial disbursement and transaction capabilities in more countries than eBay has web site operations means that the means to enter these markets has been enhanced, offering considerable leverage for future expansion.

  1. ProStores

The ramifications of eBay’s Pro Stores permits an individual located anywhere to open an on-line e-commerce web site to sell items which could be acquired from eBay or other sources. The implications further impact eBay’s international trade stance in that it furthers and fosters this through assisting customers in establishing operations in this quarter, which then can result in cross further cross border transactions.

  1. Rent.com

An apartment rental and home selection site, Rent.com provides a service to consumers looking to relocate, find a house or vacation property as well as list apartments and or homes. Its implications with respect to international trade are not as tangible as the other site services listed, but it does provide an example of the broad diversity the company offers in attracting customers which can potentially be converted to other services under its banner.

  1. Shopping.com

This site category represents one that is similar to eStores as well as Half.com in that it provides consumers with a means to purchase electronics, books, clothing, appliances, computers, mobile phones, music, office equipment and furnishings and other items at discount prices.

  1. Skype

EBay’s acquisition of Skype for $2.6 billion on September 13, 2005 (CNET News, 2005) is seen in differing views on the part of industry analysts. Some see the acquisition as representing a defensive move by the company to position it to have access to more customers, cross selling opportunities as well as utilize the service for its existing membership base to lower utilization costs and increase revenue at Skype. With 52 million customers, Skype adds 2 million paying consumers to eBay’s current base, the potential for increasing that total has real dimensions (Evan, 2005) (The Social Customer Manifesto, 2005) (Jupiter Research, 2005). Others see the acquisition as potentially risky in that the field of VoIP players has plenty of competitors that could potentially surpass Skype considering Microsoft’s varied Internet intentions in this quarter as well (Jupiter Research, 2005). Forrester Research (2005) sees the acquisition as risky in that Skype does not represent a sustainable advantage to eBay in terms of its customer base or service uniqueness. In addition, Forrester Research (2005) sees the price tag as being too high for the potential revenue conversion and paying customer base. Whichever scenario does eventually wind up being the case, the preceding is another example of eBay’s further entrance into global trade through a communications company that will provide it with added capabilities regardless of the financial ramifications. The preceding list of countries as well as sub eBay web sites and offerings is important in understanding the range of items and merchandise that is sellable through this marketplace and thus helps to provide a view as to the manner in which the foregoing has an impact on global trade. If one’s view was that eBay was the purveyor of primarily house wares, art, clothes, electronics and other such items, along with the occasional large ticket items such as the indicated Ramada Inn and or aircraft, the foregoing would change that opinion. The web site is set up to enable buyers and sellers to come together for almost all manner of products in a standard fashion, meaning that the sale of a vehicle, boat, house, airplane or other large sale item is not viewed as unusual. These aspects along with the expanded range of services and interlaced service options represent eBay making a concerned effort to corner the global cyber trading market and thus position the company as the dominant player in buy and sell options for consumers. Literature Review The examination of the implications of eBay with regard to its impact on global trade takes into account a number of theoretical aspects which have differing ramifications. Given the broad implications represented by the foregoing, an analysis of varied international trade theorems was researched to provide a basis for evaluating the preceding. The fact that theories represent the integral aspect in examining eBay’s impact upon global trade, the grouping of the literature review has been organized into theoretical categories rather than by author. This provided the opportunity, where warranted to present differing aspects within the theorem which hopefully provides a more comprehensive view.

  1. Porter’s Five Forces Model (1979, Pp 21-22)

The foundation for Porter’s Five Forces Model is the fact that differing industries in fact sustain different profitability levels, due in part to industry structure. Porter’s (1979, Pp 21-22) Five Forces Model provides a framework that models industries based upon them being influenced by Five Forces. These are (1979, Pp 21-22):

  1. Supplier Power

This aspect of Porter’s (1997) Five Forces Model represents the scenario whereby the suppliers of the raw materials wield supplier power in respect to their potential to raise or lower prices, as well as the aspect of an abundance or shortage of materials. As eBay operates on a proprietary software platform utilizing a web site that operates on its own servers, it basically controls almost all aspects of this category. The variable that supplier power could be applied to the sellers of products on its web site can be considered, however, the firm’s virtual monopoly in terms of its Concentration Ratio (see Degree of Rivalry), renders this equation as basically moot.

  1. Barriers to Entry

The potential for new firms, processes or technology to provide a means for rival firms to enter the field is always a possibility in the light of unforeseen developments. In the absence of any foreseeable developments in this area, eBay’s dominant position in the online auction industry makes the cost of entry high for potential competitors in that it is entrenched as THE online auction site with in excess of 52 million subscribers as well as the potential new subscribers as offered by its PayPal and Skype subsidiaries. As a result of eBay’s dominant market penetration, and subscriber base of 52 million, the threat of a rival would have to come close to or match the company in terms of raw numbers in bringing buyers and sellers into one marketplace. In addition, the foreign market locales already secured by eBay represent another significant barrier to entry in that a rival firm would not only have to meet certain subscriber numbers in eBay’s domestic market, the United States, but also in a percentage of the 26 foreign locales in which it is also dominant in order to be considered a serious contender.

  1. Threat of Substitutes

From an economist’s standpoint, the threat of substitutes is exercised when the demand for a product or service is affected by the change in price of a substitute product or service. The more said substitute product or service becomes available, the greater the threat and thus price elasticity. EBay enjoys a virtual monopoly within the industry as evidenced by the ‘the degree of rivalry’ as explained under category 5. This positioning virtually eliminates the potential for the threat of substitutes in that eBay represents a fixed software marketplace where it simply provides the platform for sellers and buyers to transact their business. The uniqueness of this cyber platform means that eBay is basically invisible in the selling and buying process except as a facilitator. The company’s virtual monopoly in the online auction arena means that the potential for a substitute service or aspect of a service to replace its dominance is nearly impossible. As eBay’s rates are fixed, in terms of per unit transaction, the modest fees are not enough of a point to drive substitution, as explained under Degree of Rivalry.

  1. Buyer Power

In most industry types, the category of buyer power has significance in terms of a variable which could lead to or represent weakness. In the instance of eBay, buyer poser represents is customer base on which it has a virtual monopoly. The foregoing means that the company operates with the advantage of buyer power in its favour.

  1. Degree of Rivalry

Porter (1997) posits that in a traditional economic model that the competition between rival firms has the effect of wanting to drive profits to zero as a result of price sensitivity. But, since the market and competition is less than perfect, as well as companies seeking to employ a competitive advantage of one form or another over their competition, the intensity of competition as well as the n umber and size of rival firms creates unequal skews in this area. The ‘Concentration Ratio’ is one measure of rivalry utilized by economists to determine the foregoing. eBay scores an impressive and basically unbelievable 90% of the consumer-to-consumer auction market ratio (wikipedia, 2005). Termed ‘category killer’ the preceding means that eBay has a competitive advantage which makes it almost impossible for firms to either remain in business or enter in those markets in which eBay has a presence. It also means that those firms which are operating in this industry in markets which eBay has yet to enter are at risk if and when eBay decides to enter, owing to its size, superior resources and reputation. EBay’s monopoly status is a result of it having the largest concentration of sellers and buyers, which means that one’s offering has a better chance in securing the desired price, or that one has a better opportunity to find the item one is looking for as a result of said concentrations. As a result of the foregoing competitive advantage, eBay can stave off competitive threats, if they were to surface, through a reduction in auction fees, the addition of free services or extras, as well as utilizing its broad base of other sites and services as leverage. The strong facet of eBay’s competitive advantage, in addition to its 90% Concentration ratio, is the purchase of PayPal. The foregoing provides it with not only a seamless method of transaction completion, it also provides eBay with exposure to the millions of PayPal customers who have not yet utilized the service. The foregoing is critical when one considers that PayPal is represented in 43 countries (PayPal, 2006) and eBay presently is in operation in 26 countries (eBay, 2006). The foregoing might not seem that noteworthy in face of the fact that eBay operates in cyberspace, therefore it is actually available on a global basis, unless there are governmental access restrictions. Even so, the added dimension which PayPal as well as Skype bring to the already dominant eBay positional advantage decreases the potential of a rival firm being able to exist in its matrix.

  1. Porter’s Competitive Advantage

The preceding analysis of the literature concerning Michael Porter’s (1979) Five Forces Model leads directly to his Competitive Advantage formulations. In his book ‘Competitive Advantage’ Michael Porter (1998, P 1) describes the fact that “… Competitive strategy is the search for a favourable competitive position in an industry.” He describes competitive advantage as the “… value a firm is able to create for its buyers that exceeds the firm’s cost of creating it”. The preceding represents a telling statement. Porter (1998, P 62 – 118) indicates that the competitive advantage entails cost leadership (Porter, 1998, P 11-14) as well as differentiation (Porter, 1998, P 158-160) . In the instance of cost leadership a company sets out to establish itself as the low cost producer or dominant force in its industry which also can be achieved through being the first in a position of dominance whereby ones cost structure becomes the standard. The foregoing describes eBay’s advantage which was based upon rational costs that were in keeping with realistic pricing. Differentiation, in the context as laid forth by Porter (Porter, 1998, P 158-160) is whereby a company sets out to be unique within its industry by virtue of either a product, service or some other dimension which is highly valued by its customers. In the instance of eBay this entails its auction trading platform which provides a unique methodology that is subscribers utilize to conduct business without direct interference or overt awareness of eBay’s software running in the background guiding and facilitating the process. The aspects of eBay’s Five Forces strengths and competitive advantages has implications with respect to international trade in that rival competing firms are essentially locked out of the industry thus leaving eBay as a control element with respect to international trade among individuals as well as small firms.

  1. Heckscher-Ohlin Model

This theorem puts forth that a country that is abundant in capital will be an exporter of capital-intensive goods. Conversely, a country that is labour intensive will export labour intensive products (Rivera-Batiz et al, 2004, Pp 13-19). The Heckscher-Ohlin Model posits that the relative advantage lies in a country concentrating upon the inherent advantage in which it has a relative abundance. This area is applicable to eBay in that its advantage lies in the proprietary software platform that it established in advance of other companies, with a secondary advantage being that the company was established in the United States market at the beginning of the Internet utilization explosion. These factors provided the climate whereby eBay was bale to grow t an astounding rate unchallenged by competitors until its size and dominance s being the first as well as aggressive marketing left it in a position whereby Porter’s Five Forces (1997) limited the ability of other firms to emulate its example. The applicability of the foregoing with respect to international trade lies in eBay’s exporting of a technology platform whereby consumers can utilize this foundation to conduct business within their own countries as well as with other individuals outside of their borders. The effects in terms of international trade is that eBay is contributing to the process on a micro level multiplied by the millions of its subscribers thus resulting in a significant level. As of July 2004 eBay’s international sales represented earnings of $273.7m (A£148m) for a 76% increase representing 17 countries as of that date (BBC News, 2004).

  1. Factor-Price Equalization

This theorem arises out of the Heckscher-Ohlin Model and posits that when the price of goods that are output by countries equalizes when those countries are moving toward free trade, then the factors of labour and capital will also become equalized (Trefler, 1993, Pp 961-987). In the instance of eBay, the international trading platform, in some instances and to a small degree, fosters the implementation of this theorem in that in those markets where certain items are scarce or dear, the option of availability as a result of online availability can result in lowering local prices. eBay’s influence and the nature of the transaction types is not yet that sophisticated in terms of total volume, however the continued growth of its small business segment is demonstrating such an example in the United States in a limited capacity. As the sophistication of the site and users grows, the potential for this theorem to take hold on an international level seems plausible.

  1. International Trade Theory

There are several different models which explain varying aspects of international trade. The Heckscher-Ohlin Model is one such variant which was treated as a separate case due to its theorem of labour and capital-intensive goods and the relationship to Porter’s Five Forces Model. (1997). The following theories have a different basis for equation and shall thus be explained as part of the literature review under International Trade as a prelude to the Case Study and Discussion segment.

  1. Ricardian Model

David Ricardo’s (1817) book which illustrated what has come to be known as the Ricardian Model, On the Principles of Political Economy and Taxation, which focuses on comparative advantage and represents what is considered as the most critical aspect of international trade theory. It states that countries wind up focusing on those goods that they are best at producing as opposed to a broad array of goods. The implications with regard to eBay are that the underlying foundation of the company is its software that provides the platform for individuals to conduct the auctioning of their goods. This factor creates the climate for international trade in that it transcends borders and brings together sellers and buyers regardless of location. In terms of the United States, software programs and development represents one of the services which the country is best known for. Consider Microsoft, Oracle, IBM, and the multitude of companies that produce software which is exported and utilized on a global basis. As such, the software platform of eBay is the foundation whereby it is engaged in the conduct of international trade in 26 countries as an established operation and countless others whereby individuals access the web site and utilize its services even though they do not reside in a country with a dedicated eBay site. Ricardo (1817, P 9) refers to Adam Smith in drawing an example of value in use and value in exchange, which is the foundation of eBay’s auction principle. Smith stated that the things “… which have the greatest value in use, have frequently little of no value in exchange; and, on the contrary, those which have the greatest value in exchange, have little or no value in use” (Ricardo, 1817, P 9). In the instance of eBay, this can be applied to a large percentage of the goods and products sold such as jewelry, dolls, collectibles, antiques, etc. However, the site also sells, or offers, a tremendous amount of goods and products such as computers, clothes, appliances and the like. All in all however, David Ricardo’s (1871) theory has validity in that the items of exchange generally fetch higher overall per item sales relative to their utility. The implication with regard to international trade is that money is exchanged for items offered on the site which more than likely would not have occurred as a result of the bringing together of interested parties to conduct the transaction. A limited Lulu comic book purchased by a buyer in Hungary more than likely might not have happened save for them being brought together through the eBay marketplace. The preceding might be an example whereby such could or might have otherwise occurred, however the mass scale of such transactions made possible by eBay indicates that the instances would be and were far less before the existence of the site. Therein lies a critical example of the company’s influence and effect upon international trade, it has increased the incidence of such occurrences, and thus increased trade in that quarter by bringing million of individuals into contact with each other who did not have the context to conduct such trades before.

  1. Gravity Model

Another theory of international trade that has implications with regard to eBay is the ‘gravity model’. Its implications with regard to international trade are represented by the fact that it predicts trade based upon the distance that exists between countries and the interaction of their respective economies (Anderson et al, 2003, Pp 170-192). In terms of eBay, the model works in the following fashion. Its equation is, under social scientists, takes into account the population of two differing locales and their distance. The larger the locales the most interaction occurs as a result, due to the mass of individuals (Bergstrand, 1989, Pp 143-152). In other words, using migration as the example, the number of people in Los Angeles that would move to New York is greater than the number of people than would occur between New York and San Francisco. While the relative distance are approximately equal the population of metropolitan Los Angeles is 9.5 million, as of 2000 (MSN Encarta, 2005) and the population of San Francisco represented 799,263 individuals (Study Center, 2005). Applying the gravity theory to eBay indicates that with a universe of 52 million people, the potential for a seller linking to a buyer on an international scale is greater than can be accomplished by any other medium, thus representing eBay’s hold and influence in this manner of trading. The resulting impact is that an individual in Madrid can think in terms of looking on eBay to find a Walt Disney Minnie Mouse doll and achieving greater success than searching in their hometown. Conversely the reverse is also true. An individual in Cleveland, Ohio has a higher degree of success in searching eBay for an authentic shawl made in Spain than looking in the local shops. Case Study The following shall seek to examine the varied reasons that are contributing factors to the success of eBay on an international basis by looking into the economic, economic, psychological implications which are a part of its chemistry. Regardless of location, people tend to act and think the same when it comes to buying in that they all do not like over paying for items they buy. The essential principle behind eBay is economic as well as psychological in that goods will seek to find their way into those circumstances whereby enterprising sellers will bring items to interested buyers utilizing a lower price concept to dispose of their wares. In terms of international trade at eBay, there is sufficient empirical evidence that supports the border effect. The foregoing means that the prices for items between differing countries are usually more than the prices for an item within a country (Engel et al, 1999, Pp 29-58). Modern technology has made possible the increase in price transparency as online Internet based shopping locations can be freely browsed without charge and individuals can discover the relative cost of items via comparison (Baye et al, 2001, Pp 454-475). EBay’s acquisition of the online payment source PayPal further increased its utility as well as impact in the international trade arena as it facilitated currency conversion and transfers thus making the complexity of which rate to utilize moot. The first consideration in examining eBay’s appeal as well as impact and success in international trade is that sellers have the task of determining the appeal of their offering. As a result, by and large, the high percentage of items are highly tradable, otherwise they are paying a transaction fee that will not yield results. The question which the preceding brings to mind is whether the border effect is a representation of the differing currencies or the fact that there are borders involved. An examination provided by utilizing the euro will aid in this equation and its implications with regard to eBay and its impact on international trade as to whether this is an inhibitor to eBay’s process. The common European currency is a unit of value that remains constant throughout the European Union community, however, it does not represent price setting or fixing in terms of items sold within countries as this is a factor of the laws of supply and demand. As a result, differences in the price for the same item within the European Union can be found between the United Kingdom and Spain. This same disparity can be found in online shops on the Internet as uncovered by Baye et al (2004, Pp 463-496). The preceding concept is an important aspect in the principle of the ‘law of one price’. Rogoff (1996, Pp 647-668) states that the ‘law of one price’ generally entails large as well as persistent price differentials. In terms of goods sold internationally, there is a correlation with respect to certain economic principles that aids in determining categories as well as elements present in the process. Chen (2004, Pp 1257-1286) states that in the instance of tradable versus non-tradable goods, less tradable goods show more price differentials between countries. In defining non-tradable goods Chen (2004, Pp 1257-1286) utilized the example of supermarket products where the variables of rent, labour costs and transportation where factors in the final cost, and that these components differ between countries in the European Union. In line with the foregoing, the higher transportation costs are, the higher the incidence and scope for price discrimination and thus differential in price. Factors such as differing languages as well as product regulation requirements, termed border effect, can result in price differentials thus driving them upward, along with taxes. And, currency trade flows which consists of conversion costs also represents a factor in international trade (Gagnon et al, 2001, P 704). The borderless make up of the Internet basically renders the border effect null, discounting for shipping, tariff and import regulations, with respect to differences in online shops, thus setting up the foundational parameter for the appeal of eBay as an international trading force in that buyers have the opportunity to check prices either before or during bidding in a number of ways. Thus, the differential can be termed the currency effect, however a case can be made for each in that the added shipping, tariff and other costs are potential end sale inhibitors. EBay’s 2005 December quarter international sales totalled $464,521,000 as compared against U.S marketplace sales of $504,891 which reveals the strength of this segment in driving profits. The year end results indicate that U.S. marketplace sales for the year end 2004 totalled $1,338,715,000 representing a 31% increase over 2003 year end sales, and the international marketplace sales totalled $1,157,472,000 which represented an increase of 76% over the same period in 2003 (eBay Annual Report, 2005). A Bloomberg report for October 18, 2004 indicated that eBay’s growth is being fuelled by international marketplace sales. One of the primary reasons is that eBay so totally dominates the United States market for online auction sales that overseas sellers looking to list products that appeal to Americans have virtually no choice but to utilize the company. This represents a considerable marketing advantage for the company which helps to fuel online placements even when sellers are not specifically looking for U.S. buyers. This dominance has a significant impact on the company’s ability to shut out other potential companies as well as influence global sales resulting through online site auctioning. In terms of the United States, eBay’s performance is exceptional in that the U.S. recorded a trade deficit of $68.5 billion in December 2005 (Foreign Trade Statistics, 2006). Thus, eBay’s international trade performance from that perspective represents a huge impact in terms of it being a positive trading platform in the global community where American products and companies do not fair that well. The statistics indicate that in 2004 135 million individuals representing 150 different countries listed a total of 1,339,900,000 items on eBay (eBay Annual Report, 2004). In terms of a percentage of global trade eBay is not a major force as the sales of vehicles, computer software, electronic equipment, agricultural products and other commodities are more influential. EBay’s impact in the global arena has more to do with its impact on individuals and their ability to either sell or buy items which were either unavailable or difficult to obtain prior to its existence. Even with the Internet providing global consumers with the means to shop for anything, anywhere at anytime, the principle of ‘one price’ as explained by Rogoff (1996, Pp 647-668) and the desire for individuals to seek the lowest price help to drive them to eBay as an option. The framework of eBay lends itself to fostering increased international trade as a result of the indicated borderless format of the Internet. This connect anytime, anywhere foundation provides individuals with a 24 hour 7 day a week location to list and sell their items whereby the buyers determine the price through the bidding process. EBay’s existence has had an impact in global trade in that the $1.1 billion generated by the company’s international marketplace would be nonexistent, save for it, or another firm, being the facilitator of such trading. In terms of actual size, the company is dwarfed by the likes of Wal-Mart with 287,989,000,000 in sales, as well as British Petroleum $285,059,000,000, Exxon $270,772,000,000 and Royal Dutch Shell $268,690,000,000 (Fortune Global 500, 2005), but it is the class leader in fostering sales among individuals. Its dominance as represented by Porter’s Five Forces Model (1979, Pp 21-22) with respect to:

  1. Supplier Power
  2. Barriers to Entry
  3. Threat of Substitutes
  4. Buyer Power, and
  5. Degree of Rivalry,

represents a monopolistic model of how to capture and corner a market niche. The company’s ‘concentration ratio’ of 90% is almost unheard of in the annual of modern business and the only other classical example of this type of dominance is Microsoft’s control of the PC Windows operating platform which is undergoing severe legal challenges by the European Union in terms of opening its operating code. The preceding advantage means that unless a rival firm has the sheer financial resources, market name, and Internet platform to challenge eBay, the potential of another company attempting to compete is a near impossibility. This singular control is an influence in terms of global trade in that eBay virtually has the personal international trading platform for individuals to itself. Since the company’s methodology is a facilitator whereby it supplies the means for seller and buyer to come together and establish their own terms this dominance does not represent a threat to the users of the service. In reality, eBay’s platform represents a positive for seller and buyer in that the transaction fee is the cost of doing business and is known before any activity takes place. In fact, eBay’s operating matrix represents an almost pure model of free market economics in that seller and buyer seek to establish the price of an item based upon the laws of supply and demand. It is an example of the Ricardian Model (1817) in that it represents a U.S. firm concentrating on a field, software and Internet services, which the country is known to be dominant in. It also represents an almost pure example of what Adam Smith termed as things “… which have the greatest value in use, have frequently little of no value in exchange; and, on the contrary, those which have the greatest value in exchange, have little or no value in use” (Ricardo, 1817, P 9). The foregoing are key components in eBay’s success and the company’s existence is a result of it meeting and fulfilling the needs of individuals to sell and buy products at a price that is deemed acceptable as well as available regardless of locale. The foregoing represents an application of the ‘gravity model’ (Anderson et al, 2003, Pp 170-192) as the site contains the highest concentration of sellers and buyers in online auctioning, and thus is a natural gathering place for these two forces to meet. Results In order to be successful in today global economy, a company must engage in as well as establish itself as an international operation to stave of competitors and fuel growth. Such requires positioning the company in such a manner that is can withstand the threats of rival firms and increase the barriers to entry (Porter, 1998, P 11-14). The theories of Ricardo (1817), Porter (1979), Heckscher-Ohlin (Rivera-Batiz et al, 2004, Pp 13-19) and the gravity model (Anderson et al, 2003, Pp 170-192) are components that are present in eBay’s impact on global trade even though said actual impact in terms of net dollars is relatively small. EBay represents a classic example of the free trade theory whereby prices will seek their own level through the application of the laws of supply and demand and makes a strong case for unrestricted free trade which is an underlying premise of the borderless Internet. A key attribute of eBay is its language translation software which permits individuals from differing cultures to converse. It aids sellers and buyers to translate important phrases and terms free, and while it is not 100% accurate, it represents a service the company provides to bring individuals together in a manner that potentially might not and could not happen otherwise. The company is actively working on its own language conversion software in recognition of the foregoing as announced by the company’s Chief Executive Officer Meg Whitman in August 2000 (auctionbytes, 2003). The increased efforts on the part of eBay to establish levels of transparency in currency pricing conversion, language, customs information, shipping and payment methodology is making it easier on an ongoing basis for such international transactions to occur. EBay’s operational mode represents a model of globalisation on a small economic scale. It utilizes advanced technology and an almost zero cost communications platform for users to meet and conduct business globally. The availability of the Internet on an international plane enables eBay to reach individuals eliminating border barriers and permits users to trade almost any item. When one considers that advancements in mobile technology will expand this potential to people whether they are at home or out of the house, the potential for further growth of eBay’s volume as well as international sales will increase. The potential for the application of individuals in developing countries to enter into the world stage and establish enterprises within their economies represents a new chapter in global economics that has yet to fully manifest, yet is an aspect that is definitively on the horizon. The implications are that eBay will in its small way help to contribute to increased prosperity through increased participation in global trade on the part of individuals everywhere. EBay’s listed site availability shows a skew to just 26 developed countries, even thought it is accessed from more that 150 nations throughout the world. The foregoing is a clear indication that the company’s reach exceeds its location parameters. As communication networks and new lower cost computers become increasingly available to lesser developed nations, the impact of eBay’s influence on global trade will become more telling as it brings heretofore unavailable items to further reaches of the globe. The indicated revenues derived by eBay are basically insignificant in terms of the gross sales it generates. The gross revenues of $3,271,309,000 is minor compared to the estimated $20 billion in sales flow generated between sellers and buyers (U.S. Census Bureau 2003). eBay’s largest revenue site is eBay Motors which represents an estimated $5 billion in sales. The present utilization of the Internet still shows a decided skew toward developed countries which will shift in the future as new technologies bring the medium to individuals of lesser developed countries at an ever increasing rate. EBay’s entrance into China is just such an example. With the country’s population of over 1 billion individuals the current eBay subscriber base of 195 million looks small indeed. Just a 1% market penetration means the addition of 10 million people, or approximately 5% of eBay’s present subscriber base, thus, the future number potentials are staggering. When one considers that just a small percentage of India’s 800 million have internet access, and the relative size of Africa’s population, the implications of eBay’s future impact on global trade will represent figures that will in fact be forceful in comparison. Conclusions EBay’s dominant position as the world’s number one online auction web site and its international expansion to 26 countries has thrust it onto the global stage as a developing force in international trade. The relative volumes recorded in terms of seller to buyer sales at an estimated $20billion is relatively small in global terms, however the foregoing does not represent the limits of future growth which look to be on the verge of an explosion. As pointed out in preceding segments, this platform warrants the examination of eBay’s impact on global trade which is for all intents and purposes just at its beginning in terms of influence, size and growth. Present day figures are posing interesting correlations with respect to tariff, custom and other variables that will need future resolution as the globe moves more in eBay’s direction owing to technology advancements. The effects of this online trading site with respect to international and economic models such as Heckscher-Ohlin Model, Factor-Price Equalization, the Ricardian Model and gravity model are basically at the beginning of their upward curve in terms of influence and effect. All of the foundational indications are there as eBay continues its expansion into China delves deeper into the population of India and Asia and starts gaining ground in Africa as well as South America. As ensuing growth continues, the company’s impact in terms of the indicated theories will increase as the subscriber population swells. It is difficult to conceive that the company has managed to retain exclusivity over this huge field, yet in defiance of all reason, such is the case. From the numbers, eBay has the look and fell of a new Microsoft, and if this is the case, it is sure to face the regulatory scrutiny that Bill Gates is now experiencing as its impact grows. However, the nature of its premise does not have the same practices and thus slowing down this international giant looks to be a development that will bear watching as the company continues its growth. Exactly where this success story will wind up is an unknown, but based upon the numbers, it is a source of envy. Bibliography Anderson, James, van Wincoop, Eric (2003) Gravity with Gravitas: A Solution to the Border Puzzle. Issue 93. American Economic Review auctionbytes (2003) eBay’s Tower of Babel. 18, February 2003. https://www.auctionbytes.com/cab/abu/y203/m02/abu0089/s05 Baye, M., Morgan, J. (2001) Information gatekeepers on the Internet and the competitiveness of homogeneous markets. Issue 91 American Economic Review Baye, M., Morgan, J., Scholten, P (2004) Price dispersion in the small and the large: Evidence from an internet price comparison site. Issue 52. 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