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Global auctions are the kind of ideal market Adam Smith could only have dreamed of. Sellers are, at least in theory, guaranteed a price that isn't too low: they get to sell to the highest bidder anywhere in the world. And buyers are assured the price isn't too high because they get to choose the lowest one being offered by any seller in the world. Location becomes unimportant. You're not penalized for being a seller stuck in low-traffic, low-price Bismarck or a buyer shopping in high-cost Manhattan. Auctions also minimize transaction costs ("friction" in e-commerce-speak) and eliminate the need to operate bricks-and-mortar stores. Online auctions "wring out the inefficiencies in the supply-chain process," says FairMarket CEO Scott Randall. They also benefit from Metcalfe's Law (named after Robert Metcalfe, the founder of 3Com Corp.): the value of a network increases by the square of the number of people on it. Every time a conventional online retailer adds a new user, it's just one more person who can buy its products. But every time eBay adds a new user, he can buy from or sell to any of the 7.7 million people already on the network. A retailer, in other words, is one to many, while eBay is many to many.
Online auctions have their limits. Auctions are most useful for setting the price of goods of indeterminate value. (Some of the earliest ones were held by Roman soldiers selling off battle loot.) Auctions make more sense for items whose worth is uncertain (an antique chair or a used forklift) than for commonly sold goods (a new pair of name-brand blue jeans).
But online auctions are shaking up the way America does business. People are quitting their day jobs and finding they can support themselves entirely by selling on eBay and other auction sites. Traditional retailers are significantly augmenting their revenue by selling on eBay, and some are shutting down their stores entirely. Businesses that piggyback onto online auctions--insurers, shippers, escrow services--are booming. Offline businesses that compete with eBay--from antiques stores to classified-ad sections--are bracing for trouble.
Some of the impact will be more profound. Online auctions may destabilize the notion of a fixed price, leading buyers and sellers in all kinds of transactions to negotiate more over what items should cost. And they are likely to further erode the economic barriers between nations, speeding the way to a single world market. The full effects of eBay's hyperefficient, banish-the-middleman revolution haven't yet been felt, but one thing is clear: the pre-Internet model of buying and selling is going, going...
It all began with Pez and a man named Pierre Omidyar, now 32. In the summer of 1995 Omidyar's fiance (now wife) Pam, who collected Pez dispensers, was bemoaning how hard it was to find other people to trade with in the San Francisco Bay Area. Omidyar was already an e-commerce pioneer (Microsoft eventually bought out eShop, a company he co-founded), but lately he had been wrestling with how the Internet could be used to create fairer markets. The Pez dilemma led Omidyar to the flash of an idea: an Internet auction site could function as the ultimate efficient market.