South-Western College Publishing - Economics  
Investors Want to Keep Costs at (e)Bay
Subject Costs
Topic Production and Costs
Key Words Profit, investors, costs, revenues, competitor, marketing
News Story

eBay, the online auction company, is making slightly more profit than analysts predicted. However, the company still makes only about 1 percent profit. Investors also remain worried about pending computer costs. The company has recently suffered some periods when its website was down, annoying prospective buyers and sellers. eBay is trying to be as stable in its service as a utility. It is testing a back-up system, which would reduce outages to half an hour. The effect of the computer upgrades is expected to be that the share of revenues remaining after deducting the costs of providing the service will fall from over 80 percent to somewhere in the 70s.

The company is not unduly concerned about its economic health. Registered users rose from 5.6 million to 7.7 million from June to September 1999. It hosted 36.2 million auctions in the period, up from 9.2 million a year earlier. It is fifteen times as large as its nearest competitor. Its German operations are expanding rapidly. It is shortly introducing a payment service for its users. More aggressive marketing may also be considered.

(Updated December 1, 1999)

Questions
1. What are some examples of fixed costs that eBay would have? Refer to the news story and use your insight into the nature of the web business.
2. What are some examples of eBay's variable costs? Again, refer to the story and your general knowledge.
3. a) Based on the news story, what is the relative size of eBay's fixed and variable costs? Explain your response.
  b) Draw a diagram relating prices and costs in dollar terms to output. Depict curves representing eBay's total fixed cost and total variable cost. Also show total cost. Draw it to the scale identified in part (b).
Source George Anders, "Investors in eBay Worried About Cost," The Wall Street Journal, October 27, 1999.

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