Spero Consulting

Archive for November 20th, 2008

& eBay’s Asym­met­ric Infor­ma­tion Problem.

We’ll actu­ally tackle those top­ics in reverse order.

The older princess needed a new pair of head­phones for her Zen Photo.

The Zen is a par­tic­u­larly sturdy lit­tle 20GB hard drive. It’s almost two years old and still going strong. In fact, it has sur­vived a few pair of ear­phones: the orig­i­nal pair of Sennheiser CX300s that we bought with the Zen and an almost iden­ti­cal pair of Cre­atives that came with a Dell XPS lap­top. (The ear buds that were included with the Zen were an insult to all that is decent and good in this world, but prob­a­bly wor­thy of a few of her High School Musi­cal tracks.)

Asym­met­ric Infor­ma­tion and Mar­ket Fail­ure: this time we wanted the Sennheiser CX-​500 model for her, and for awhile we debated between buy­ing the replace­ments on eBay ver­sus an online store.

We finally set­tled for an online store because there was no price point on eBay that would ensure that they were gen­uine Sennheis­ers rather than coun­ter­feits, and that’s eBay’s prob­lem where sell­ers with infe­rior goods can pre­tend to be otherwise.

The prices at online stores var­ied from about $50 to $115 although noth­ing below $60 or so was in-​stock.

The non-​auction, “buy-​it-​now” prices on eBay ranged from about $15 to $115.

We like to save money, but the prob­a­bil­ity that we’d receive gen­uine Sennheis­ers for $15 seemed very small. More­over, at that price, if they were gen­uine, the prob­a­bil­ity that they weren’t con­tra­band or weren’t stolen seemed exceed­ingly small.

As we worked our way up the price range, we couldn’t con­vince our­selves that we’d actu­ally receive gen­uine Sennheis­ers. $28? Doubt­ful. $38? Pos­si­ble for a des­per­ate seller, but it is not dif­fi­cult to fake such des­per­a­tion. $48? Start­ing to get near online store prices; so, it would seem like there was a bet­ter chance of authen­tic­ity, but if we were devi­ous, we’d offer units at one store for $15 and for $50 per unit at another. At the $50 store, we’d den­i­grate the $15 ones. (In fact, that seems to have had occurred at point in the past.)

Using that or a sim­i­lar ratio­nale, we elim­i­nated of all eBay’s offer­ings – even the ones adver­tised at Sennheiser’s MSRP.

We must admit that we didn’t actu­ally read through every sin­gle list­ing; so it is pos­si­ble that there is a seller who could have cred­i­bly sig­naled the authen­tic­ity of their mer­chan­dise to us, but we didn’t find them in allot­ted time. More­over, we weren’t clever enough to design a screen­ing device to sep­a­rate the authen­tic from the not.

So, for head­phones and sim­i­lar goods, it would seem that eBay’s elec­tronic mar­ket may fail oth­ers as it did fail us.

Of course, we’ve bought a vari­ety of goods (and types of goods) on eBay, but those have been either from large sell­ers with non-​eBay rep­u­ta­tions to pro­tect or small sell­ers with spe­cial­ized, non-​brand-​name offer­ings, and with eBay rep­u­ta­tions to pro­tect. So, rep­u­ta­tion would seem to be cru­cial. (We haven’t searched, but it is quite pos­si­ble that some­one has com­mented on this phe­nom­e­non before, and we’ll try to have more to say about it in the com­ing days, as we think about the effects of cost struc­ture and profit margin.)

Our Coun­ter­feit­ing Pre­dic­tion: even in good times, coun­ter­feit goods from the Far East are a large prob­lem for cer­tain firms, and Sennheiser’s prob­lems with head­phones are a good exam­ple of that.

We sus­pect that many coun­ter­feit units are made in the same fac­to­ries – though not nec­es­sar­ily to the same stan­dards or with the same qual­ity mate­ri­als – as authen­tic goods.

With the seem­ing inevitabil­ity of dif­fi­cult eco­nomic times in the US, which pretty much means a reduc­tion in con­sumer demand, we’d expect that many con­sumer prod­uct firms will order less from their Far East fac­to­ries. So, we could eas­ily imag­ine worse eco­nomic con­di­tions in coun­tries like China com­pared to the US.

With sub­stan­tial excess capac­ity due to that reduced demand for authen­tic goods, will the fac­tory own­ers be able to avoid the temp­ta­tion of counterfeiting?

We think it is a rhetor­i­cal ques­tion with an obvi­ous answer.

Unfor­tu­nately, in dif­fi­cult eco­nomic times, we could also eas­ily imag­ine an increased demand for such infe­rior goods.