Ebay and Business Structures
There are a variety of different business structures that comprise the market in the world today. The most common ones found in the business world today are sole proprietorships, partnerships, and corporations. From these you will also find monopolies and oligopolies. Economists assume there are a number of different buyers and sellers in the market which leads to competition which allows prices to change in response to changes in supply and demand.
1) In many industries you there are substitutes for products, so if one type of product becomes too expensive the consumer can choose an alternative product that is cheaper, or one of better quality. This is called perfect competition within different companies. However, in some industries there are no substitutes for a product. In a market with only one supplier of a good or service, the producer can control the price meaning that the consumer does not have a choice, cannot maximize his or her total utility, and has very little to no influence over the price of the good or service they require.
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This is called a monopoly, where the single business is the industry. In slight contrast, you have the oligopoly which is at least two companies competing for market share. In an oligopoly, products are usually very similar, if not identical to each other, and in order to make their product more attractive they will lower their prices, forcing the other one out of the market until that firm lowers their price. Finally, the fourth type of business structure is called monopolistic competition.
Like an oligopoly, these firms produce similar or identical products where substitute products usually aren’t available, although monopolistic competition is between many firms, where an oligopoly is usually two or three different companies controlling the market. In monopolistic competition, a firm takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other firms. (2) Ebay is an American multinational consumer to consumer corporation that manages eBay. com, which is an online auction and shopping website. 3) However, does eBay fall under the category as a monopoly, oligopoly, monopolistically competitive, or a perfectly competitive firm? There are other companies that are in the same market, such as Quibids and Amazon, but does eBay dominate most of the market?
The singer/comedian Weird Al Yankovic sings a song to the tune of “I Want it That Way” originally by the Backstreet Boys that somewhat parodies eBay. In this comical video, Weird Al sings about all the “junk” he bought on eBay’s auction website. “I’ll buy, I’ll buy, I’ll buy, I’ll buy, I’m the highest bidder now. (4)This lyric reflects how the company works. People from around the world put their possessions of any range of value on the website and people that are interested in their product make bids against one another until time runs out at the end of the auction period. Since the beginning of its operation, eBay has expanded to not only include its normal “set time” auction format, but also works with other companies like Half. com, PayPal, Kijiji, and StubHub. Ebay works with these other companies in order to make using eBay attractive to anyone looking to do anything.
Now people cannot only bid on other people items, but they can do standard online shopping, ticket trading, money transfers, and many other services. Other large firms such as IBM use eBay to sell their products or services using competitive auctions as well as fixed priced storefronts. Ebay has also acquired rights and shares to other big companies such as Craigslist and Skype. As of April of 2008, eBay acquired a total of 26 other companies, most of which are related to online auctions. 5) This cuts off the market to many of these smaller companies, leaving eBay amongst several other big companies heading the market in online auctions. Because there are only a handful of other big online auction companies in the market and eBay has bought out all the smaller ones, it does not meet the characteristics of a perfectly competitive market structure. However, the goods and services sold on eBay can be considered perfectly competitive. There is a multitude of buyers, or producers, and consumers have options with substitutes.
Most of the products sold within their category are similar and for the quality of the product, they are typically within the same price range of one another, and each individual seller chooses their price based on other similar goods sold on the site. Ebay, as a company itself, fits more in the category of an oligopoly, which is actually pretty common in any market. Other alternative websites include Yahoo! , Amazon, and Quibids, but there are only a small number of them, certainly not hundreds as in monopolistic competition.
Also, eBay is interdependent on the few other auction website companies, competing with the fees they charge, as well as quality of customer support, and buyer/seller reliability. Another characteristic of eBay that coincides with it being considered an oligopoly is the fact that it has numerous entry barriers. It’s such a large company with many restrictions, and it would be hard for an up and coming substitute auction website to break into the market and compete with eBay or the other top companies in the industry. (6)
Weird Al Yankovic, through his humor, gives a pretty accurate description of how eBay works. Though obviously made as a joke, it still suggests “this worldwide garage sale” is where you can basically find anything you want with the right amount of “dough. ”(4) It also somewhat suggests that eBay can be addicting and get a hold on people, since he claims to have bought so many useless items for really no reason at all. Analogously, eBay does the same thing in the market; it has a solid hold on the market, shared only with a few other firms.