Jeffrey Young, a reporter at zdnet, got taken on eBay

So we bid on a bag. As usual (as counseled by our daughter), nothing much happened until the very last half hour, when one bidder pushed up the bid price until it exceeded our “maximum” (the price we had shared with eBay as our limit.) We were disappointed, but philosophical. There were several others on offer after all. One would be ours.

The next morning I was surprised to find an official email from eBay informing me that although I had lost the auction, the winner had backed out and I now had a “Second Chance” to buy the bag for my bid “limit” amount. I was a bit nonplussed that what I had thought was a private amount was now being publicly revealed, and I wondered how the buyer could have decided to back out between Sunday night and Monday morning when the email was sent to me, but no matter. I went ahead and agreed to the “Second Chance” deal. After all, I had been willing to pay that much so what was the problem?

The problem, of course, is that it’s fraud. Mr. Young got taken in more ways than that, though. He paid hundreds of dollars for a cheap fake. Fake goods in the supply chain is something I’ve discussed previously, so I’ll leave this at that. One of the articles I referenced in that post even mentioned eBay as a conduit for passing counterfeit goods.

Today, I’m interested in obvious fraud that could be easily addressed. Good Faith, the premise that both particpants in the transaction are acting honestly, and a little bit of greed are the necessary elements for the fraud to work in the current system.

Nothing can be done about the greed–people have been looking for bargains and taking advantage of one another for thousands of years. What can be changed, however, is the information available to play the ebay game.

The mere existence of “Second Chance” is interesting because it indicates to me that ebay has significant enough outtrade and settlement risk issues that they’re losing a significant number of sellers, so they’ve created Second Chance as a mechanism to help sellers better mitigate settlement risk. Unfortunately, they’ve tilted the balance in favor of unscrupulous sellers in the process.

Look at the risks of Shill Bidding from the seller’s perspective. If they get too greedy, they will exceed the limit of their bidders and wind up “winning” their own auction. This costs them whatever the listing fee on the item was and they still have to re-list (and re-pay the fee), doubling their transaction cost and hope that they don’t overbid the auction again.

Now, thanks to Second Chance, ebay has effectively provided a safeguard which mitigates the risk to a greedy seller of exceeding the buyer’s maximum price. The dishonest seller can now safely discover the real winning bidder’s limit without having to double their transaction fee to obtain the information.

The sad thing about this problem is that there is an easy solution. Just add some transparency to the whole process. This would allow bidders to decide if a seller had a higher outtrade rate than they were comfortable with. Allowing the buyer to make an informed decision about whether or not a seller seemed to have an unacceptably high rate of outtrades or Second Chances would introduce a more objective mechanism than the reputational parody called feedback.

Ebay could provide statistics on the number of auctions a seller offered through “Second Chance,” along with some comparative system-wide data on other sellers of their volume, product, or price point. Sellers who attempted to abuse Second Chance would be relatively easy to spot. Shill bidders would be forced to either curtail their greed, which would be a good thing, since Shill Bidding isn’t going away any time soon despite any effort ebay might make.

All but the most innumerate shoppers could tailor their bidding and, more importantly, make decisions on whether or not to accept Second Chance offers appropriately.

Unless, of course, ebay is more concerned about
1) competition among auction sites for sellers (who are the actual revenue stream) than for buyers; or
2) maximizing prices paid, since they take a percentage of the final auction price
than ensuring that people feel that ebay is running an “honest” marketplace.
3) scaring people off by acknowledging fraud (and how to avoid fraud fight it) than actually fighting the fraud or driving the fraudsters elsewhere*

* This was the case when I first waded into the ecommerce fray. Once I began tackling fraud problems in earnest (despite some initial internal resistance), however, it became a positive piece of our brand. We received significant numbers of unsolicited comments from customers that they preferred us to our competitors because we did a better job of keeping our site “clean.”

[…] Michael points out a nice article by XXX discussing ways that sellers can game eBay’s second chance mechnisms to assure they get the best price. […]