International Trade and Finance Association THE INTERNATIONAL REACH OF EBAY FOR U.S. BUYERS

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1 International Trade and Finance Association International Trade and Finance Association 15th International Conference Year 2003 Paper 15 THE INTERNATIONAL REACH OF EBAY FOR U.S. BUYERS Jannett Highfill Bradley University Kevin O Brien Bradley University This working paper site is hosted by The Berkeley Electronic Press (bepress) and may not be commercially reproduced without the publisher s permission. Copyright c 2003 by the authors.

2 THE INTERNATIONAL REACH OF EBAY FOR U.S. BUYERS Abstract Data was collected from the U.S. ebay site for the categories of animation art and Steiff teddy bears. It was found that U.S. consumers bought items from sellers in 13 countries whereas slightly over 20% of sellers were not in the U.S. In general the outcomes of the auctions (final price, number of bids, and whether the item sold or not) were not affected by the country of the seller. For Steiff teddy bears, auctions by sellers from Germany and Austria had more bids (as compared to U.S. sellers) and for Germany there was also an increase in the probability that an item sold. On the other hand, for animation art, Hong Kong sellers were penalized in the sense that there were fewer bids on their auctions and the probability of an item being sold was reduced. They were not penalized however in the final auction price. Presented at 13th International Conference, Vaasa, Finland, May 2003

3 INTRODUCTION The Internet is often said to reduce search costs for buyers and sellers. In the case of internet auctions, these cost reductions create markets that did not previously exist. As Yannis Bakos says: lower search costs will also enable new markets to emerge. For example, low buyer search costs and global reach have enabled ebay to create markets in goods like second-hand cameras where otherwise the search costs would be too high to allow potential buyers and sellers to find each other in a conventional market (2001, 74n). Severin Borenstein and Garth Saloner argue that in many-to-many transactions, when the transaction involves atoms as well as bits, but the cost of moving the physical goods is low compared to the value of the good, the reach of the internet is far greater than the historical alternatives. For example, consumer-to-consumer auctions make it feasible to search across many cities, states, and even countries to purchase a unique item that the buyer will cherish. The main consequence of the increased reach is the improvement in matching of buyers and sellers, especially in previously very inefficient markets like that for used consumer durables (the market served by ebay) (2001, 4). A second advantage of the internet is that it allows for asynchronous communication whose advantages are especially obvious when consider questions of the reach of a market. Although ebay is frequently mentioned in discussion of the economics of the internet, the only existing empirical work on ebay in the literature is David Lucking-Reiley s descriptive paper (2000) (with the very minor exception of Highfill (forthcoming)). Lucking-Reiley summarizes basic ebay data such as revenue, fees, auction formats, feedback forum through The goal of the present paper is to empirically investigate the question of whether ebay has extended the reach of U.S. consumers in two of the markets it facilitates, animation art, and Steiff teddy bears. At the most basic level, it is shown that U.S. consumers had access through ebay to product from sellers in 13 countries, and that slightly over 20% of sellers were not in the U.S. Being a non-u.s. seller generally increased the Hosted by The Berkeley Electronic Press

4 number of bids for an item, but this did not translate into a higher final price for a product as shown in the final price regression. As for shipping outside the U.S., shipping to both the U.S and Canada had a large, significant effect on the final price (as compared to only shipping within the U.S.) but shipping internationally had no significant effects. For payment methods that facilitate international transactions, paypal had a significant effect on the number of bids and whether the item sold but not final price. INTRODUCTION TO EBAY AND THE DATA SET ebay is an internet site where its 50 million registered users can post item for sale and bid/buy on the posted items. According to the site, more than $5 billion worth of good and services were sold on ebay does not own the goods sold; it merely provides a virtual venue for transactions between buyers and sellers. Most of the transactions are done by a fixed closing time ascending price auction. Bidding and buying is free; sellers pay various listing and selling fees, ranging from a nickel to a hundred dollars or more. These revenues make ebay highly profitable. According to the site ebay s site in 2002 it had revenues of $1.21 billion and income of $254.9 million. It has been profitable in each year of its existence making it the exception in internet businesses. The Wall Street Journal (October 18, 2002, B4), for example, cites ebay as a sparkling counterpoint to the gloom of the Internet sectors but it also suggests that ebay s growth may not continue at past rates. Although ebay has had close competitors, at present it is the most successful internet auction site, largely because of the positive network effects. At any one time over ten million items are listed. And while most of ebay s revenue is from listing and selling fees it also derives revenue from other sources, selling banner ads, a credit card, etc. But it has had to be careful to post only the kinds of advertisements that do not compete with the items up for auction on the site. As Meg Whitman, the CEO of ebay, has said, We cannot compete with our customers (Cohen, 2002, 252). Although ebay has auction sites in 19 countries (Argentina, Australia, Austria, Belgium, Brazil, Canada, France, Germany, Ireland, Italy, Korea, Mexico, Netherlands, Singapore, Spain, Sweden, Switzerland, Taiwan, and the United Kingdom), the data for this paper was collected in November and December 2002 exclusively from the U.S. ebay site. Five hundred observations were collected from the U.S. ebay site for two categories: (1) Collectibles > Art, Animation & Photo Images > Animation Art, and (2) Dolls & Bears > Bears > Steiff. To give an idea of the size of these categories, at any one time there were about 4500 completed auctions and 3000 current auctions in Animation Art and about 4000 completed auctions and 1100 current auctions for Steiff toys.

5 Descriptive statistics are found in Table 1. (Table 1 only includes observations used in the regressions and so some of the descriptive statistics for the complete data set may differ from what is reported in Table 1.) Hosted by The Berkeley Electronic Press

6 Table 1 Means and Standard Deviations Sample Variable Pooled Cel Steiff Auction Characteristics First Bid (245.99) (304.46) (169.88) Final Price (178.18) (143.75) Bids (4.76) (3.65) Sold Buy it now Reserve Country of seller U.S Germany Netherlands Hong Kong Austria Canada Shipping U.S U.S./Canada International Method of payment Paypal MO/CC Other online Personal check Visa/MC Billpoint N (204.82) 4.27 (5.31) A typical item listed in Animation Art is a production cel from a cartoon, or more commonly, a reproduction of a production cel. But as is often the case with ebay, the range of items listed is large, Paper Mache Garfield figurines, keychains, books, viewmaster reels, to mention just a few. First bids ranged from under a dollar to $5000, (a Disney Pinocchio original cel) with and with an

7 average of about $80. Closing bids ranged from a dollar fifty to $1650, but the latter item did not sell (even with 38 bids) because the reserve price was not met. The average final bid was under $40. The explanation is that many items listed on ebay do not sell (over 55% in this category in the data), and all the items with initial prices above $1000 did not sell. A typical item in Steiff toys is a Steiff teddy ear, but teddy bears from other companies such as Deans and Merrythought are also listed, as wells as books, collecting computer programs, trays and toy dishes, postcards, catalogs, and the like. Initial bids ranged from a dollar to $3100 for a 1911 Steiff Brown Bean on all fours. The average initial bid was just under $70, and the average ending bid just of $75 and in this category over 60% of the items listed sold. Final bids ranged from a couple of bucks to $3050 for a vintage Steiff bear that did not sell. The most expensive item that sold was a Steiff clown doll (ca 1927) for $2500. Personal details of the bidders are not revealed on the site, but for sellers the country where they are registered is given. In all there were listings from sellers registered in 13 countries: Australia, Austria, Belgium, Canada, France, Germany, Hong Kong, Netherlands, Japan, Spain, Sweden, the United Kingdom, and the United States. In the data set as a whole, the 79% of the listings were from U.S. sellers, 9% from Germany (but all in the Steiff category), the Netherlands slightly under 3% (again all teddy bears), Hong Kong and Austria 1.5%, Canada 1.3%. The United Kingdom and Australia had almost 1% of the listings each. For the Animation Art data 9% of the items were listed by sellers who are not registered in the U.S. The non-u.s. country with the highest number of items was Hong Kong 3% of the listings. There were 8 listings from Australia and 6 listing from Canada; there were four listings from France, Japan, and Belgium, and two from the United Kingdom. The Steiff category was chosen because it was conjectured that the representation of non-us sellers might be large. (There was not any particular conjecture about the number of non-us sellers in Animation Art.) For the Steiff category, 70% of the listing were by sellers registered in the U.S. Almost 20% were by sellers registered in Germany (Steiff bears are handmade in Germany), over 5% by sellers in the Netherlands (still to that degree the marketplace of Europe?), and 3% from Austria. Of the countries with sellers in the single digits, 7 each were from Canada and the United Kingdom, 2 from Belgium, and one from Japan, Spain, and Sweden. In addition to collecting data on starting price, final bid (or price), number of bids and whether the item sold; data was also collected data on the currency of transaction, and shipping and payment policies. Although sellers can choose various currencies for their auctions, for the entire data set only the U.S. dollar was chosen. The shipping options were U.S. only, U.S. and Canada, or Hosted by The Berkeley Electronic Press

8 international (and the options were mutually exclusive). Payment options were paypal, billpoint (ebay s original online payment service which has since been merged with paypay since ebay purchased the latter) cashier s check or money order, personal check, visa or mastercard, or other online payment service. (These options are not mutually exclusive.) EMPIRICAL MODEL AND RESULTS Three different regression specifications were run to investigate the effects of international variables on the outcomes of ebay auctions. For these regressions the dependent variable, in order, was the following: final sale price, number of bids and whether the item sold or not. The first two regressions were estimated using OLS whereas the last was estimated using logit since the dependent variable is a dichotomous variable. The three regressions did vary somewhat by the independent variables used in each regression. For the first regression, where final sale price was the dependent variable, the number of bids was included as a determinant of the final sale price. Obviously this was not an independent variable in the bid regression and it was also not used in the sale regression since a single bid meant the item was to be sold. Other than this variable, the remainder of the independent variables were identical for each regression and for the last two regressions, all the independent variables used were the same. These independent variables are discussed below. Lastly, the regressions were run for three separate samples: a pooled sample, where both the cel sales and Steiff sales were included, a cel sample and a Steiff sample. The independent variables can be grouped into four categories: auction characteristics, country of the seller, type of shipping and method of payment. In terms of the auction characteristics, the variables included are the first bid, number of bids, a buy it now binary variable and a reserve price binary variable. In the final price regression, a higher first bid should induce a higher final price. An increase in the number of bids should also increase the final price as a higher number of bids indicates greater interest in an item. The buy it now feature could have a negative or positive effect. The effect could be negative if the feature preempts multiple bids for a popular item. Conversely, it could have a positive effect if induces a person to bid on an item with an excessive buy it now price. Lastly, the reserve feature should have a positive effect since to meet the reserve on an item will generally require a high price for the item. In the bids and item sold regressions, the predicted effects of the auction characteristics are different. A higher first bid may discourage bidding and so discourage sale of an item and so its effect should be negative in both cases. For the bids regression, the effect of the buy it now variable should be negative since

9 the whole purpose of the feature is to preempt multiple bids. The effect on whether or not the item sold is unclear: it may induce quick sales or it may discourage interest in the item. In terms of the reserve price variable, this should encourage multiple bids so that bidders can meet the reserve for an item. On the other hand, this feature may decrease the chance of an item being sold since some bidders may be discouraged from trying to reach the reserve amount. The number of bids was not included in the item sold regression since more than one bid implies that an item will be sold. In the country of seller category, the following countries were included: Germany, the Netherlands, Hong Kong, Austria, and Canada. The United States is the default category and so each coefficient on these binary variables is a comparison to the United States as the country of the seller. The effect of these variables depends on whether the country of the seller discourages trading on items. The shipping variables indicates where the seller is willing to ship and there are two variables: whether the seller ships to the U.S. and Canada or whether he or she will ship internationally. If the internet encourages international sales, both these variables should have a positive effect. The default category is the U.S. shipping only and so the coefficients of the other two variables are being compared to this category. The last category is the method of payment and these also have implications for international sales. Any online methods, i.e., Paypal, other online payment methods, Visa/MC and Billpoint, should facilitate international transactions and so should increase the final price or bids. These should also increase the probability of an item being sold. Money order and cashiers checks (MO/CC) and personal checks do not facilitate international transactions and so these should have no effect or a negative effect on the three dependent variables. Table 2 contains the pooled results and these will be discussed first. As predicted, a higher first bid, and a higher number of bids and the existence a reserve price all increased the final price. The effect of the reserve price was particularly large. Existence of the buy it now feature had a positive but insignificant effect. Though the coefficients were negative, the country of seller variables did not significantly affect the final price. Thus it appears that compared to the U.S as the country of the seller, the country of the seller does not matter as a determinant of final price of an item. Of the shipping variables, shipping to U.S. or Canada had a large, positive and significant effect on the final price. Thus, extending the shipping range beyond the U.S. into Canada increased the final price for items. However, shipping internationally had no effect which appears to indicate that facilitating international sales beyond the U.S. and Canada did not increase final prices. Method of payment, including the online methods, had no effect on the final price. Thus, whether the method of payment facilitated international transactions or not, there was no effect by method of payment. Hosted by The Berkeley Electronic Press

10 Table 2 Pooled Results Final Price Bids Item Sold Constant (-.70) 2.71*** (5.05) 1.01*** (3.37) Auction Characteristics First Bid.80*** (3.79) -.002*** (-3.98) -.003*** (-3.93) Bids 11.90*** (9.53) Buy it now 2.84 (.22) -2.55*** (-7.96) -.99*** (-5.74) Reserve *** (7.50) 3.95*** (9.82) -.77*** (-3.61) Country of seller Germany (-1.32) 1.98*** (3.83).65*** (2.29) Netherlands (-.96) 2.79*** (3.32).44 (.93) Hong Kong (-.07) -3.28*** (-2.82) -2.03*** (-3.16) Austria (-.63) 10.82*** (8.98) (.00) Canada (.46) (-1.26).45 (.75) Shipping U.S./Canada *** (5.11).01 (.02) -.39 (-1.17) International 5.90 (.47) (-.01) -30* (-1.84) Method of payment Paypal 3.35 (.25) 1.44*** (4.25).38** (2.16) MO/CC 5.68 (.31) -1.02** (-2.22) -.56** (-2.25) Other online 7.40 (.61).25 (.81).05 (.33) Personalcheck (-.99).70** (2.26).06 (.42) Visa/MC (1.10) -.50 (-1.45) -.04 (-.23) Billpoint (-1.12) -.34 (-1.05) -.15 (-.92) N Adj. R (%-correct)

11 For the second regression, the pooled bids sample, the auction characteristic variables had the expected effects. As expected, a higher first bid and the existence of the buy it now feature both significantly decreased the number of bids. However, the effect of the first bid was quite small. Also as expected, the existence of the reserve price significantly increased the number of bids. Unlike the final price regression, many of the country of seller variables were significant. Sellers from Germany, the Netherlands and Austria had a significant larger number of bids compared to sellers in the U.S. Sellers from Hong Kong had a significantly lower number of bids than U.S. sellers while being a seller from Canada had no significant effect. Thus, in most cases, being a non- U.S. seller increased the chances of a larger number of bids and this implies that ebay has increased the global reach of the markets observed in this study. Though being a non-u.s. seller generally increased the number of bids for an item, this did not translate into a higher final price for a product as shown in the final price regression. Possibly, bids for non-u.s. sellers were done in relatively small increments. The shipping range of the seller had no effect on the number of bids. Method of payment had mixed effects on the number of bids as use of Paypal and personal checks significantly increased the number of bids while use of MO/CC s significantly decreased the number of bids. While the increase in bids from Paypal (an online method of payment) and the negative effect of MO/CC s supports the hypothesis that the internet increases the global reach of makers the personal check result does not. The remainder of the method of payment variables had no effect on the number of bids. The last regression investigates the determinants of the probability of an item being sold. As predicted, a higher first bid significantly decreased the probability of an item being sold but the effect was quite small. The buy it now and reserve features both had a significant negative effect on the probability of an item being sold. Thus, the use of the buy it now and reserve features discourages interest in an item. Two of the country of seller variables had significant effects on the probability of item being sold: being a German seller increased the probability of a sale whereas being a Hong Kong seller decreased the probability. None of the other country of seller variables affected the probability of an item being sold. Only the Hong Kong results contradicts the hypothesis that the internet extends the reach of markets while the German result supports this hypothesis. The insignificant effects at least do not contradict the global reach hypothesis. Of the method of payment variables, only the Paypal and the MO/CC methods significantly affect the probability of selling an item. The coefficients both support the global reach hypotheses as the online method (Paypal) increased the probability of a sale while a conventional mail method (MO/CC) decreased the chance of a sale. All the remaining payment variables were insignificant. Hosted by The Berkeley Electronic Press

12 Table 3 contains the results for the cel sample. Recall that the cel sample is primarily made up of sellers from the U.S. (91%). In the final price regression, all the coefficients of the significant variables have the correct sign with the coefficient of the reserve feature being very large. In the cel sample, the only non-u.s. sellers were from Hong Kong and Canada. Though the coefficients were negative for both variables, neither was significant and so being an international seller is not a disadvantage for a seller. In terms of the shipping variables, the effect of shipping to both the U.S. and Canada had a large, significant effect. This result supports the market extension hypothesis for the internet but the insignificant effect for the international shipping variable does not support this hypothesis. Possibly, the market for cels covers primarily the North American market and does not extend into other countries. Method of payment had no effect on the number of bids as none of these variables were significant. Given the primarily U.S. nature of the cel market, the method of payment, particularly online methods, do not exert any effect on bids. For the item sold regression, the auction characteristic variables had the expected signs with the first bid and buy it now variables being significant. Of the country of seller variables, the Canadian variable was insignificant but the Hong Kong seller variable was negative and significant. Thus, being a non-u.s. seller decreased the probability of a cell being sold and this result contradicts the market extension hypothesis. In contrast, the method of payment results are consistent with the market extension hypothesis as an online form of payment (Paypal) increased the probability of selling an item while a traditional mail form of payment (MO/CC) decreased the probability of selling an item. The remaining method of payment variables had no effect on the probability of a cel being sold.

13 Table 3 Cel Results Final Price Bids Item Sold Constant (-.47) 2.13*** (3.01).55*** (1.21) Auction Characteristics First Bid.04** (2.26) -.002*** (-4.16) -.002*** (-2.49) Bids 17.37*** (10.59) Buy it now -.37 (-.02) -1.35*** (-3.71) -.96*** (-3.84) Reserve *** (4.62) 6.32*** (9.87) -.67 (-1.49) Country of seller Germany Netherlands Hong Kong (-.17) (-1.20) -1.68** (-2.33) Austria Canada (-.11) -.42 (-.30) 1.75 (1.57) Shipping U.S./Canada *** (4.67) -.31 (-.48) -.10 (-.24) International 6.95 (.54) -.34 (-.96) -.26 (-1.14) Method of payment Paypal (-.15).25 (.71).42* (1.78) MO/CC (-.14) -.14 (-.23) -.70* (-1.68) Other online 2.55 (.18) -.16 (-.43).01 (.07) Personalcheck -.48 (-.03).20 (.57).11 (.50) Visa/MC 6.24 (.48) -.37 (-1.01).07 (.31) Billpoint (-.62) -.82 (-.23) -.18 (-.79) N Adj. R (%-correct) Hosted by The Berkeley Electronic Press

14 Table 4 contains the Steiff sample results and this sample contains many fewer U.S. sellers (68 percent were U.S. sellers). For the final price regression, again all the auction characteristic variables have the expected sign with the reserve price variable having a very large effect. All these variables were significant except the buy it now variable. Though the sample contains many more non-u.s. sellers, none of the country of seller variables had a significant effect on the final price. This indicates that being a non-u.s. seller neither helps nor hurts sellers in this market. Similar to the cel results, shipping to both the U.S and Canada had a large, significant effect on the final price. Again, this may indicate a greater level of integration between the U.S. and Canadian markets. The international shipping variable was insignificant and this does not support the market extension hypothesis. None of the method of payment variables, including the online methods, had any effect on the final price. In the bid regression, first bid, buy it now and the reserve feature all were significant and all had the expected sign. Two of the county of seller had significant effects and both were positive with the Austrian variable being particularly large. Both these results support the market extension hypothesis and the German result is not surprising given that German sellers are the most common after U.S. sellers. Like the pooled results, the higher number of bids from Germany and Austria did not translate into higher final prices. The shipping variables and all the method of payment variables had no effect on the number of bids. In the item sold regression, all the auction characteristic variables were significant and had the correct with the effect of the first bid variable being very small compared to the other two variables. None of the remaining variables in this regression significantly affected the probability of a Steiff item being sold.

15 Table 4 Steiff Results Final Price Bids Item Sold Constant (-.59) 3.27*** (4.08) 1.86*** (4.42) Auction Characteristics First Bid.21*** (4.06) -.003*** (-2.98) -.005*** (-3.68) Bids 9.62*** (5.05) Buy it now (-.13) -3.24*** (-6.26) -.97*** (-3.74) Reserve *** (5.51) 2.46*** (4.53) -1.32*** (-4.98) Country of seller Germany (-.86) 1.16* (1.77).22 (.67) Netherlands (.53).81 (.82) -.09 (-.19) Hong Kong Austria -.06 (-.001) 8.33*** (6.32) (.00) Canada (-.36) (-1.25) -.86 (-1.02) Shipping U.S./Canada *** (3.29).49 (.41) -.83 (-1.41) International 5.60 (.25).41 (.79) -.39 (-1.48) Method of payment Paypal 6.77 (.25) 2.72*** (4.32).41 (1.34) MO/CC.08 (.003) -1.12* (-1.71) -.34 (-.99) Other online (.60).55 (1.18) -.01 (-.06) Personalcheck (-.68) 1.03** (2.01) -.02 (-.08) Visa/MC (.88) -1.33** (-2.09).-.32 (-1.04) Billpoint (-.71) -.19 (-.32).12 (.40) N Adj. R (%-correct) Hosted by The Berkeley Electronic Press

16 CONCLUSION Consumers buying products from the U.S. ebay site have the opportunity to buy from sellers in countries far and wide. Consumers can go to the U.S. site for access to foreign sellers rather than have to navigate the ebay sites in those countries. Although sellers on the U.S. site have a choice of currencies, in the data all auctions were in dollars so that exchange rate issues did not arise. In general the outcomes of the auctions (final price, number of bids, and whether the item sold or not) were not affected by the country of the seller. Perhaps not surprisingly though, given that half of the data was for Steiff toys, auctions by sellers from Germany and Austria had more bids (as compared to U.S. sellers) and for Germany there was also an increase in the probability that an item sold. On the other hand, Hong Kong sellers (all in the animation art category) were penalized in the sense that there were fewer bids on their auctions and the probability of an item being sold was reduced. They were not penalized however in the final auction price. REFERENCES Bakos, Yannis. The Emerging Landscape for Retail E-Commerce, Journal of Economic Perspectives 15(1), Winter 2001, Borenstein, Severin and Garth Saloner, Economics and Electronic Commerce, Journal of Economic Perspectives 15(1), Winter 2001, Cohen, Adam. The Perfect Store. Boston : Little, Brown and Co., Ebay s Profit More Than Triples As Transaction Revenue Surges, Wall Street Journal, October 18, 2002, B4. Highfill, Jannett. An Economist Looks at ebay, National Social Science Journal, forthcoming. Lucking-Reiley, David. Auctions on the Internet: What s Being Auctioned, And How? The Journal of Industrial Economics, XLVIII(3), September 2000,