CHAPTER 13 • Game Theory and Competitive Strategy 523 antiques and automobiles to Beanie Babies and rare coins Founded in 1995 by Pierre Omidyar in an effort to sell a broken laser pointer, eBay dominates the online person-to-person auction industry It recently listed millions of products for sale, including such unusual items as a Caribbean island, 154 acres in the Catskills, and a ghost town in Nevada In 2011, eBay accounted for about 85 percent of all U.S online auction sales, totalling over $60 billion of merchandise sold On average, over 14 million items are listed for sale at any given time How has eBay come to dominate the U.S Internet auction market? Why haven’t other Internet auction sites (such as Yahoo and Amazon) succeeded in taking market share from eBay? The answer is that Internet auctions are subject to very strong network externalities If you wanted to auction off some rare coins or stamps which auction site would you choose? The one that had the largest number of potential bidders Likewise, if you wanted to bid for rare coins or stamps, you would choose the auction site with the largest number of sellers Thus, both sellers and buyers gravitate to the auction site with the largest market share Because eBay was the first major Internet auction site, it began with a large market share, and its share grew thanks to the network externality To understand the critical role of network effects, look at what happened when eBay tried to expand internationally In China it had to compete with Taobao, whose managers knew how important it was to gain an early market share advantage Thus Taobao decided not to charge sellers any commissions, so that most of its revenue was from advertising While its revenue was limited by this strategy, Taobao quickly became the dominant Internet auction site in China, with a market share exceeding 80 percent in 2010.23 And eBay likewise lost out in Japan, this time to Yahoo! Japan Auctions, which aggressively obtained an early market share lead The strong network effect then made it nearly impossible for eBay (or anyone else) to challenge Yahoo!’s dominance in Japan Let’s return to the United States and see how eBay auctions operate For single items, eBay uses an increasing price auction which works roughly as follows: Bids must be increased with minimum increments The highest bidder at the close of the auction wins and pays the seller a price equal to the second-highest bid plus the minimum increment by which bids are increased (say 25 cents) So, if you bid $20 for a particular DVD and you are the winning bidder, you will pay the second highest paid that was paid – say $19, plus the 25-cent minimum increment The eBay increasing price auction does not correspond precisely to the auction formats described previously because there is a fixed and known stopping time, which can cause bidders to place bids strategically at the end of the auction Many Internet auctions are dominated by private-value items (However, because anyone can put an item up for sale, there are common-value issues— how reliable is the seller, and are there possibilities for resale?) The privatevalue emphasis of these auctions is especially true of unique antiques that may have considerable value to particular bidders With private-value auctions, you needn’t worry so much about the prior history of bidding: The bids of others 23 According to Forbes, May 3, 2011 In §4.5 we explain how network externalities affect sales of a product