Daily Archives: November 12, 2006

Are we defined by our markets? – or – Smart Procurement Uses Yahoo!

One of the most interesting sessions I attended at INFORMS was the Online Auctions I session in the Auctions and e-Commerce cluster which consisted of the following talks:

  • How Can You Price a Phrase? Search Engine Auctions as Evolving Practices by Charles W. Smith
  • The Geography of Trade on eBay and MercadoLibre.com by Asis Martinez-Jerez
  • How Much is a Dollar Worth? Tipping versus Equilibrium Coexistence on Competing Online Auction Sites by John Morgan

Each of these talks fundamentally tackled a different aspect of a challenging sociological question whose answer may define us much more than we define it. Do we shape the market or does the market shape us? Although neither of these talks directly answered this question, the insights offered by the speakers are definitely worth due consideration.

In the first talk, Charles told us that real auctions are a discovery process – they define the value of a commodity for which we do not know the true value. This tells us that eBay is not a true auction, since the items traded on it have a well defined value (range). On the other hand, search engine auctions are true auctions since they are defining how much our basic terminology is worth as a means of indexing information. This also tells us that not only is procuring advertising online no easier than procuring advertising offline – but it is fraught with challenge as we have no idea how to accurately price a phrase – whereas a century of advertising has assisted us in pricing a service (if not its return).

This is all based on the theory of markets accepted by the speaker – that markets are definitional practices that generate meanings as interactive and mutual role-taking social practices that evolve over time. Furthermore, their generated meanings are not only subject to external factors, but they affect non market practices and our daily lives. For example, we don’t look something up on the internet, we google it. We don’t auction it on the internet, we eBay it.

In the second talk, Asis explored whether or not the internet has altered the geographies of trade as it crosses international borders and sites like eBay allow you to buy and sell worldwide. After all, with 34B in sales in 2004, eBay can essentially be used as a proxy for eCommerce. What Asis found was that the same location effect is more persistent in online trade than offline trade. Commerce is abnormally high within city and state (provincial) borders and abnormally low across borders. Asis theorizes that trust and cultural factors are the driving reasons, but this is hard to prove from pure numeric data. This tells us that if you’re going to buy something online, you should probably only consider local vendors since the odds are that you are going to end up buying local anyway.

In the third talk, John ran an experiment to determine whether or not eBay and Yahoo are in equilibrium coexistence or if the US auction market is tipping to one side or the other. In the experiment, which used a large number of identical coins offered for sale on both markets using the different types of auctions offered (reserve vs. no reserve, soft vs. hard close, etc.), John determined that revenues on eBay are consistently 20 to 70 percent higher than those on Yahoo and that eBay auctions attract approximately two additional buyers per seller than equivalent Yahoo auctions. This tells us that you should sell on eBay, but buy on Yahoo for smart procurement – and that the market is most likely slowly tipping towards eBay and that, as they have in most of Europe, Yahoo auctions in the US will most likely eventually disappear. (As a contrast point, Yahoo essentially owns Japan, and eBay and Yahoo are essentially equal in popularity in China and other parts of Asia.)