Continuously opining, intermittently publishing.

The Best Offer

Posted by oshane | Leave a comment at the end of this post.

I liked eBay’s Best Offer feature when it came out. Best Offer is a way for buyers to offer a lower price on a sale that employs on a fixed price auction, where the seller sets his own price for the item’s listing. Best Offer provides a way for buyers and sellers to negotiate and exchange information in a way that neither may want to do publicly. The seller can then counteroffer a lower price to the buyer without ruining his profit opportunity if he has multiple items. The buyer can suggest that the seller’s price is too high given prevailing auction trends and the seller can tell the buyer that his cost is X with the eBay and PayPal fees, so the lowest he can go is X + Y.

They can also, frankly, communicate with one another about the deal in spite of eBay’s draconian prohibitions or restrictions on buyer-seller communication otherwise.

But, like all eBay features, the usability comes with a crippling price. While the Best Offer does likely promote more sales, thereby generating happiness and revenue for the sellers, buyers and eBay, it also cripples the ability for sellers and buyers to efficiently revoke those offers and counteroffers before acceptance has occurred. In fact, once an offer (counteroffer) is made, the offeror cannot revoke his own offer for 48 hours. At that point, the offer necessarily expires anyway. So, on one hand, if the offeror decides that his stated price is incorrect (either too high or too low), he can’t change it. What if the buyer offers a price that he would like to raise to entice a faster sale? What if he realizes the price he offered is too high? eBay does make exceptions for obvious mistakes (offering $999 instead of $99), but what if as part of the negotiation process, either party wants to change the offer before the currently offered price has been accepted? He can’t.

On the other hand, if the offeror decides that he would like to keep his price open for longer than 48 hours, because he would like to give the offeree a little more time to say yes, he can’t do that either.

I appreciate that eBay sets some sort of time limit on the offer, particularly since the offer is irrevocable until expiration, but why not allow the offeror a default expiration and allow him to change that while also allowing him to revoke the offer at any time before acceptance?

Fundamental contract law provides that the offeror can revoke his offer any time before the offeree accepts the offer, but once the offer is accepted, there is a binding contract (assuming there is an exchange on both sides, i.e. money for an item, bartering, etc.). eBay flouts the first part of this basic notion by preventing either party from revoking his own offer and by forcing the expiration at a certain time.

In a way, eBay is importing its notions (legal and philosophical) regarding auctions to fixed price sales. For instance, legally, once a bidder bids in a bona fide auction, assuming there is no minimum price that must be attained before the seller is obligated to sell, the seller is legally and ethically bound to sell to that bidder until a higher one comes along, so on and so forth until the highest bidder has won the auction. From a contract theory perspective, the offeror has impliedly stated, “I will sell this item to whomever of you bids the highest.” As soon as there is a bid, the offeror has had his offer accepted. It is the offeree (now the acceptor) who can have his own acceptance superseded by another offeree. But the offeror (seller) is bound by his words which have been agreed to.

With a fixed price auction, the same rules need not apply, because the seller is offering one price. If a buyer comes along and counteroffers another price, why should the buyer be locked into that counteroffer? He’s not auctioning something. Whether or not another buyer can counteroffer something better is immaterial. The offer itself in a fixed price sale, just like the ones you find whenever you walk into a retail store, is inherently different from an auction, which relies on the binding of the seller and the competition between buyers. In a typical fixed price sale, there may certainly be competition between buyers for a limited number of items, but the offeror has not bound himself to selling to the highest bidder.

Nevertheless, eBay transmogrifies a fixed price sale into something that acts like an auction, for no reason other than it establishes control for eBay. Maybe it was easier to program the software to handle the transaction, but in any case, it is a suboptimal solution. If the buyer and seller aren’t free to walk away from the sale, then it is harmful to the marketplace.

What if the buyer finds the same or substantially similar item from a different buyer, as is often the case on eBay? Why shouldn’t he be able to cancel his offer to purchase at a lower price – so long as the seller has not accepted it yet – so that he can find a better price elsewhere? Why shouldn’t the seller be able to cancel the counteroffer to sell at a particular price – so long as the buyer has not accepted it yet – so that he may find a more willing buyer? In the case of small inventories, perhaps the seller was is to sell the item locally in person to someone else and wants to cancel the offer.

In either case, from a philosophical standpoint, eBay is choosing to restrict the freedom of the parties to choose how they enter into contracts. From a practical perspective, eBay is actually harming commerce, because if either party wants to revoke his offer, he usually has a good economic reason to do so, whether it comes down to a better deal elsewhere or the buyer’s realization that he doesn’t want to take this product or a situation where the seller can sell the item to someone locally. In all these cases, the better opportunities (the bird in the hand) may evaporate before the offer expires or the other person chooses to reject it; eBay is requiring the conversation to go on longer than either party would like, perhaps for so-called reasons of fairness (2 birds in the bush).

eBay places more obligations on both parties than the law would, for reasons that are unclear to me. I’m not suggesting that eBay cannot contract with its users as the marketplace to set and enforce certain rules about the way contracts/purchases/auctions are to be conducted on their own website (property). I’m suggesting that what it is doing is inefficient and not the correct or optimal way to conduct a fixed price “auction” or sale. I’m also not stating that eBay should allow shill counteroffers from the seller so that he makes offers that he cannot possibly fulfill: if eBay wants to restrict a seller selling three items to only have three extant counteroffers on the table with three buyers at any one time, that’s reasonable: it fulfills the expectations of reasonable buyers and prevents eBay from suffering a bad reputation by sellers who are acting in a way that will guarantee they violate contracts. But the seller should be able to revoke one of those counteroffers to sell one of his items to a new buyer if it makes economic sense.

Currently I have two items for sale that are locked in a counteroffer black hole since the buyers have not rejected them yet and 48 hours have not expired. It turns out I would like to give one of those items away to a loved one, but I cannot, because to do so would be to possibly violate a contract that may get formed by the buyer (counter-offeree) if he chooses to accept my counteroffer before expiration. So, now I’m stuck not able to give the item away as I would like, because eBay will not allow me to revoke the counteroffer as the law would.

To be clear, assuming that I could revoke these Best Offers, but assuming I had not, if a buyer had accepted one, a contract would be in place. I would honor the contract. But now eBay is forcing me, if I want to use their system (which is one of the few ways I can expand my market beyond my small town), to keep an offer open longer than is economically efficient or optimal.

6 Responses to “The Best Offer”

  1. Thee.MB says:

    This should go under “Why Make It?”

  2. That was a different thought track. I like your quality that you put into your post . Please do move forward with more like this.

  3. Roland says:

    I’m quite confident of your ability to think and once again I see that you write well. I love the “what if” and of course the depth of your analysis. The solution is simple–competition. Is eBay the only thing going? Perhaps there is an opportunity for! 🙂

    • Adam says:

      Profits in the marketplace are derived not from absolute efficiency (no profits) but from being the more efficient than the alternatives, including quality of good delivered.

      Marketplace rules, such as a 48 hour term, create well understood marketplace environment that meets the needs of most participants. The ability to make and then rescind a counteroffer before the 48 hour limit, may be very inefficient to another participant who has alternative buyers/sellers to consider and only allocates a small time slot in each 48 hour period to negotiate with you on this particular sale.

      By extending a counteroffer (rather than accepting the buyers offer) you have increased the transaction cost for you and the buyer. In fact, if you now withdraw the counteroffer, you remove the opportunity for the buyer to even transact at that price and capture any value surplus which may compensate for the time spent negotiating, essentially transferring the cost of negotiations with you to an alternative purchase the buyer would now have to pursue anew.

      If the burden of this time-limit as a component of transaction cost should in the future prompt you to suspend negotiations and accept the buyer’s offer, because you assess the cost of a 48 hour wait unacceptable.

      On the other side, the fact is, because of the rule an optimal buyer knows he does not even need to evaluate your counteroffer for 47.999 hours and he can seek a better offer with a shorter time limit from other suppliers. That delivers significant negotiation value to the buyer and is implicit in your offer. When Ebay constrains the form of the offer it creates standard terms which for smaller purchase values create more efficiency because the time invested in negotiation quickly becomes the largest cost. Alternatively time limits are valuable when engaging in multiple simultaneous negotiations as it creates a time window to seek the best price from alternate suppliers.

      While it may be efficient to you to place and rescind offers within 48 hours, it does create a significant transaction cost burden on other participants to monitor negotiations more frequently than perhaps is efficient for them.

      • oshane says:

        Adam – I am somewhat imprecisely conflating the efficiency of the market (100% efficient = no profit, as you so aptly put it) with the efficiency of the offer/counteroffer/acceptance process. I think what is disturbing is that eBay weighs this so heavily in favor of buyers. A buyer without the system cannot request a more favorable price, but with the system can preclude all other buyers by offering a price that is too low, but not low enough to cause the Seller to intuit that he isn’t serious.

        If seller offers an item for $100 when its reasonable hypothetical value lies somewhere between $80 and $120, a buyer could offer $1. Seller will likely reject such an offer as a waste of his time.

        Let’s say, however, Buyer offers N, where N is substantially but not absurdly lower than $100, e.g., $60. May the Seller take it in certain circumstances. Sure. Buyer runs the risk of Seller rejecting the offer, but if he can offer a price low enough, he can keep the product out of the hands of others (except, per eBay’s system, those who would purchase at full listed price) who might offer a more favorable price.

        Assuming Buyer only means to buy one of the type of item Seller is selling, then I’m not sure that a shorter offer/acceptance time-frame will make it so much less efficient. Buyer runs the risk, upon offer, of having the offer accepted while he is scouring eBay for better prices, because, by definition, the offer is binding for 48 hours as well.

        I’m not advocating for eBay to allow 1-minute offers – email notification is not instantaneous, but 30-minute offers might be worthwhile. In any case, I think the appropriate method is for eBay to allow the users to set their offer expiration times themselves, perhaps in certain increments. It allows buyers and sellers to reasonably decide how much temporal friction is worth. Maybe I’m willing to pay 15% more than I would have offered if the offer will be accepted in two hours. Otherwise, I foresee having to wait up to 46 more hours to find out whether Seller will accept or deny before I can move on to another more favorable Seller. Vice versa. That is, users are more apt to correctly gauge the worth of their own time with respect to the meta-transaction if they are given a choice.

        I suspect, actually, that eBay does this to hinder off-line transactions while the user’s offer or counteroffer is valid. If Buyer only wants one item, eBay is betting on the fact that Seller, given a longer time frame, will have a more likely chance of saying yes to the transactions, thereby generating fees for eBay. Vice versa.

        If Buyer offers $X for Y hours, which Seller misses altogether, there was actually no efficiency or time valuation problem for Seller at all, because he was unaware of the offer to begin with. But it does release buyer from his second-order obligation to eBay so that he can go elsewhere, including not-eBay to effect his transaction.

        In fact, the more I think about it, the more I am sure that eBay does this to keep a higher likelihood of profits for itself. The irony is that with a freer system, I’m also convinced Buyers and Sellers would act in ways more beneficial to themselves, effect a higher number of transactions overall and lead to greater profits for eBay.

  4. Alan says:

    I agree with you completely. As a buyer, I simply don’t use Best Offer because I can’t specify the expiry time of an offer I make, and I’m sure that if I were a seller then I would be equally put off by not being able to specify the expiry time of any counteroffers.

    It may be able to hack it by adding an extra term in with your offer, which states something along the lines that notwithstanding any time limits specified by eBay, your offer must be accepted by some time that you specify, and if accepted after this time then the sale is cancelled and the accepter is responsible for any eBay fees that may still be charged. At least, I *assume* that that would work, but it’s certainly messy.

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