South-Western College Publishing - Economics  

Internet Auctions: The Price (and the Cost) Is Right
Subject Comparative Statics
Topic Monopolistic Competition
Key Words Auction, Consumers, Businesses, Sales, Competition, Price, Income
News Story

Internet auction sites are on the rise, selling everything from antiques and books to consumer electronics goods. E-Bay and Bid.com are two examples of auction sites. Sales of auctioned goods and services amounted to $1.4 billion in 1998, and are expected to grow to $19 billion by 2003. Today, over half of transactions are between consumers, but businesses are realizing that they can benefit; by 2003 they will probably account for two-thirds of sales.

Small businesses have been suffering from competition from larger retailers who can afford to buy in large quantities. Web auction sites provide a means to fight back. A large number of consumers can be reached immediately. The prices paid can be double the starting price. Many sellers have found their income increased significantly. There is no lease on a shop. There is no need to run expensive advertisements. There is no theft or breakage. The workload is less. E-Bay charges a mere dollar or two to post an item, and takes 5 percent on the first $25 of the high bid, 2.5 percent on the next $975, and 1.25 percent of the balance.

(Updated July 1, 1999)

Questions

1.
a)What are the fixed and variable costs associated with selling a particular kind of antique in a store?
b)How do these change if instead the retailer decides to sell them using an Internet auction site?

2. Why might the demand for the antiques be greater on the Internet?

3.
a)Assuming that the market for the antiques is monopolistically competitive, and that a store sells antiques in a conventional outlet, draw a diagram showing the store's equilibrium price, output and profit in the short run.
b)Suppose that the owner decides to sell the store and sell over e-Bay. Draw the demand and marginal revenue curves based on the news story. Add the average total cost and marginal cost curves, assuming that the marginal costs are constant and bearing in mind your answer to Question 1. Show the new equilibrium price and output and the profit.
c) Is it surprising that businesses are expected to become more involved in Internet auctions over the next few years? Explain why or why not.

Source Lorrie Grant, "Going, going, gone.com," USA Today, May 17, 1999.

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