In 1846, an Irish immigrant named Alexander Turney Stewart opened a store in New York City unlike any that Americans had seen before. Located downtown, on the east side of Broadway, what became known as the Marble Dry Goods Palace was a huge emporium that offered luxury and everyday items alike. Stewart's innovations as a retailer were numerous: He introduced what are believed to have been the first in-store fashion shows in America. He lavishly appointed his interiors, in striking contrast to the merely functional look of shops up to that point. And he was the first in the nation to use the street-level plate-glass windows as a display for merchandise.
Then there was A. T. Stewart's most important innovation: His products came with price tags. At that time, in most stores, prices were set by haggling. The result was a frustrating dance between customer and salesperson, who parried back and forth until they managed to arrive at (in the words of one retail historian) "a price which neither party to the transaction considered robbery." Stewart saw that this experience left buyers feeling taken advantage of, and it encouraged salespeople to squeeze the most from every transaction rather than build long-term relationships with customers. So he marked each product with a fixed price.
Customers embraced the new "no haggling" policy, and the Marble Palace became an enormous success. Sixteen years after the store's debut, Stewart opened an even bigger one, the Cast Iron Palace at Broadway and 10th Street, which occupied a full city block and at the time was reputedly the largest retail establishment in the world. Stewart's success—and his idea—did not go unnoticed by other merchants, and soon a plethora of other large stores, from Gimbels to Macy's to Wanamaker's in Philadelphia, abandoned haggling and adopted fixed prices. Within a generation, the price tag became ubiquitous; by the late 19th century, fixed prices seemed inseparable from the retail experience.
Almost a century and a half after Stewart's innovation, a man named Pierre Omidyar opened another store unlike any that Americans had seen before. eBay, in Omidyar's vision, was to be the world's biggest open market: a democratic agora where small sellers could compete with huge corporations, where shoppers of all kinds could find products they'd never dreamed of being able to buy. As with the Marble Palace, though, eBay's greatest innovation was in pricing: It replaced fixed prices with auctions. In line with the site's democratic ethos, there would be no corporate central planner assigning value to goods. Instead, prices would be determined organically, by the ever-changing flow of supply and demand.
Again customers responded, making eBay an enormous success. Other auction sites sprang up, but network effects—the more buyers eBay had, the more sellers it attracted, which in turn attracted more buyers, and so on—made the company difficult to beat. After the dotcom boom collapsed, eBay was one of the few companies to weather the storm, expanding its business briskly during the recession of 2001. The following year a business book declared it the most important company in ecommerce, anointing it as "the perfect store."
Here, though, is where the two stories diverge. A. T. Stewart's fixed prices touched off an enduring revolution, but Pierre Omidyar's big idea hasn't stuck. Today, auctions are a smaller portion of ecommerce than they were in 2001, and even on eBay they are a dwindling, if still important, part of the business: They now account for just 31 percent of all sales on the site and are no longer at the heart of the company's business model. Dane Glasgow, vice president of global product management at eBay, told me that "eBay does not have a selling format of choice. We're indifferent to format." This creates, to be sure, something of a dilemma for the company, since customers very much associate it with auctions. But as a corporation, eBay is now remarkably diversified, making money through its ticket reseller, StubHub; its bargain deals site, Half.com; and especially through PayPal, the preeminent online-payments system that last year posted a staggering $3.4 billion in revenue and is expected to do twice that by 2013. And on the eBay site itself, where tens of billions of dollars in goods change hands every year, the majority are sold through Buy It Now, a button that makes an eBay transaction similar to a purchase from Amazon.com or any other online store—with a fixed price that would make A. T. Stewart proud.
It isn't that auctions are going to disappear anytime soon, either from eBay or the broader online shopping ecosystem—for certain categories, they're still common and valuable (80 to 85 percent of eBay's used-car listings, for instance, are auctions), and eBay still handles millions of auctions annually. But today online auctions are a niche service, whereas a decade ago it seemed to many as if they were going to transform the way everything was bought and sold. Pattie Maes of MIT's Media Lab prophesied the disappearance of fixed prices, just as Jay Walker of Priceline.com—which pioneered the use of reverse auctions for consumers—insisted that price tags on things like books were going to become a thing of the past. Some investment bankers caught the bug: Bill Hambrecht, formerly chair of boutique bank Hambrecht & Quist, believed he would democratize IPOs through the use of auctions, and he even comanaged Google's IPO on this basis. As The Economist described it in 2000, people saw the Internet "creating the possibility of a permanent worldwide bazaar in which no prices are ever fixed for long, all information is instantly available, and buyers and sellers spend their lives haggling to try to get the best deals."
The allure of auctions and other kinds of dynamic pricing was easy to understand. A fixed price is always, in some sense, the wrong price: At any time, there are people buying an item who would be willing to pay more than they are, and there are people not buying that same item who would purchase it at a lower price. So for businesses, setting a fixed price is a complicated balancing act—you want to find a way to charge the spendthrifts as much as possible while keeping the cheapskates as customers. And though companies have come up with a variety of techniques to get around the fixed-price problem—producing multiple versions of the same good, bundling products together, charging different prices based on when or how much you buy, and so on—these are all relatively blunt instruments, since they still don't let the seller set a price for each individual customer. Dynamic pricing, epitomized by auctions, was a new solution, enabled by technology. Sellers would no longer wonder how much they might have gotten for a product. Instead, they would get the right price every time, at least in theory, because the price would be determined strictly by demand. That's the way the stock market works: Prices adjust instantly in response to supply and demand. There are bids and asks, and when those meet, a sale is made.
But it was also clear that buyers and sellers weren't drawn to auctions just for their efficiency. They found the new pricing format enormously alluring. Indeed, buying on eBay was likened to a really great drug. In a 1999 Slate piece, for instance, economist Steven Landsburg declared that he was "addicted" to eBay and wrote of spending long stretches of time monitoring auctions even though he knew this made no economic sense. Salon's Stephanie Zacharek said that telling her friends about eBay was like introducing them to heroin. For many, perhaps most, people, this was their first experience with auctions. The novelty, the competition, and the thrill of winning all came together in an intoxicating brew.
In those early years, in other words, auctions were offering people what economists call hedonic benefits—the experience of bidding on eBay had value in and of itself. The rhetoric of auctions reinforced this idea: You didn't buy a product, you won an auction. And the competitive thrill meant that lots of customers were willing to pay more. A 2005 study of shoppers in the market for American Eagle silver dollars found that even when sellers offered a Buy It Now option that was below prevailing market prices, eBay buyers tended to ignore it, preferring to take their chances with the auction. The authors of the study suggested that this was because auctions had an entertainment value that ordinary sales didn't. That is, auctions seemed to make shopping more fun. And when you put all of this—the prospect of more efficient pricing, a broader selection of goods, occasional bargains, and added entertainment value—together with the more general sense that the Internet was going to transform everything, it's not entirely shocking that people's expectations for auctions, and for eBay, got out of hand.
So what changed? Why did auctions, in a matter of years, go from world-shaking innovation to seeming curio? To begin with, the experience of auctions changed over time, generally in ways that made them less appealing to both buyers and sellers. Scot Wingo, CEO of ChannelAdvisor, which consults for ecommerce companies, points to the advent of sniping—the practice of placing winning bids at the last second—as something that has alienated ordinary shoppers. "New bidders don't understand or expect sniping, so when it happens, you see people leave in frustration," he says. It's not that sniping is illicit—depending on the kind of auction, bidding as late as possible often makes sense. But sniping has stripped auctions of much of their entertainment value. What fun is it to wait for seven days, only to be outbid at the last second, with no chance of competing?
Bargains, too, have become less common, as the market matured and people on both sides of the transaction became savvier. The fact is that bargains were probably never as common as people thought—both anecdotal accounts and academic studies suggested that eBay bidders were subject to what the Romans called calor licitantis, or bidder's heat: They'd get caught up in the auction and bid more than they originally intended. Even so, in the early days of eBay, when there were fewer and less experienced bidders, it was more likely that the real value of an object might be overlooked. As shoppers became more sophisticated and informed, the chance that multiple people would recognize an object's real value grew as well. In effect, the rationalizing of the market likely reduced both overbidding and huge bargains. This made prices more accurate: eBay merchant Jordan Insley, who sells massive quantities of electronics, mostly through auctions, ran a recent experiment comparing the price he got for iPod touches sold at a fixed price versus the amount he got using an auction format; the average prices were within $2 of each other, and the auction price was actually slightly higher. But this also made the price-setting process less exciting. Why go through an entire auction in order to arrive at nearly the same price you could have set before it started?
Another key to eBay's original success was the unprecedented variety of goods it offered. In the years since, though, the site's superiority in that arena has slipped. In certain categories—collectibles, apparel, automotive parts—it remains the market of choice. But the expansion of Amazon's Marketplace, and the ease with which Google can help you find esoteric goods all over the world, means that buyers and sellers now have many other places to do business. And because of what Nancy Koehn, a business historian at Harvard, calls "the imperialism of search engines," sellers no longer need an eBay listing to get their products in front of customers. "In the late '90s, if you wanted a very unusual, hard-to-find item—like, say, a 17-inch Passier saddle—eBay was the one place you'd look," Koehn says. "These days, you'd never think of starting there. You'd start with Google." In fact, plenty of sellers start out on eBay, build up a brand name and customer base, and then open their own online stores and start selling on Amazon.
Really, though, the biggest factor in the decline of the auction may simply be that the novelty of bidding wore off. "The Internet stopped being a source of wonder and became a place to do certain kinds of business," Koehn says. "Once that happens, you start to think about things like 'Does it make sense to spend this much time on an auction when I might not even get the item in the end?'" In econospeak, the hedonic benefits of bidding on eBay diminished.
The paradox here is that the more mainstream and popular eBay became, and the more familiar people became with auctions, the less exciting they seemed. As the novelty wore off, other factors, like convenience, grew more important. So, too, did things like shipping costs. For instance, Wingo, the ChannelAdvisor CEO, contends that a crucial moment in eBay's history came when Amazon decided to put some of its marketing money into free shipping instead. By contrast, eBay left decisions about shipping costs up to the sellers, in line with its general hands-off approach. In fact, eBay's old fee structure—which charged a percentage of an item's sale price, rather than the total price to the customer—encouraged sellers to keep shipping costs high as a percentage of the total price.
This wasn't necessarily irrational for sellers: One interesting study shows that bidders seem to neglect high shipping costs when they bid on items with low starting prices. But once Internet shoppers came to see free or low-cost shipping as their birthright, eBay's high shipping costs became a serious disadvantage. So, too, did persistent concerns about trust on the site. All the evidence suggests that fraud is unusual on eBay, but a few high-profile incidents and the fact that the company did little to vet sellers (again, in line with its desire to create an open, relatively unregulated bazaar) gave people something to worry about. By contrast, they learned not to worry about Amazon, which sets high hurdles for companies to be able to sell in its Marketplace and stringently monitors them once they do.
One can certainly blame eBay for not doing enough to mitigate these problems. At times, the company seemed to have bought into its own mythology, assuming that its business was so intrinsically revolutionary that it could run on autopilot. Former CEO Meg Whitman famously joked that "a monkey could drive this train." Wingo accuses eBay in those days of "drinking the auction Kool-Aid." The management, he says, "didn't pay enough attention to what consumers really wanted." That's changed in recent years. Since taking over as CEO in 2008, John Donahoe has done quite a bit to improve the buyer experience, sometimes at the cost of alienating sellers—the fee structure, for instance, is now set up to encourage sellers to keep shipping costs low. But many buyers have abandoned the auction format and are unlikely to return.
In any case, whatever eBay may have done wrong, it's hard to avoid the conclusion that the flight from auctions was not ultimately the company's fault. Instead, the shift was largely driven by the way commerce on the Internet has changed. Businesses have become savvier and more flexible in their pricing, just as consumers have become savvier in the way they shop. There may be limits to how much consumers will allow companies to fine-tune prices—when Amazon experimented with charging different people different prices for the same product, consumers balked. But in general, we've gotten used to companies changing their prices regularly in response to supply and demand. And the ubiquity of price aggregators, which allow you to see at a glance many prices for the same product, has turned shopping into a crude reverse auction, or what Koehn calls a "de facto bidding war for your dollars." At the same time, pricing as a whole has gotten more competitive, which means it's more efficient—getting a bargain in an auction is less important, because it's easier to find bargains at traditional stores. In other words, much of what seemed distinctive about auctions—dynamic pricing, the possibility of bargains, competition—is now common. And this is, at least in part, something eBay can actually take credit for: After auctions made it possible for people to find quality used goods for a fraction of retail, it became significantly harder for anyone to charge exorbitant prices.
On top of all this, even as auctions themselves have become less important, the bargain-hunting, reinvent-the-market ethos of the auction has turned out to be more important than ever. Sites like Groupon, LivingSocial, Gilt Groupe, and eBay's own StubHub are all companies that, in a broad sense, are built on the concepts that made eBay so successful: the flexibility of prices, the importance of network effects, the value of empowered consumers. "These sites are all, in some way, playing and letting people play a new hunting-and-gathering game, in which the goal is to find the best price for some very specific thing consumers want," Koehn says. "And I think you can make a case that eBay's auctions are where people first got the idea that this was a game consumers wanted and were able to play."
Of course, auctions are still a game that some consumers want to play, and it's premature to write an obituary. For instance, eBay executives think that the mainstreaming of mobile technology is going to be good for auctions, since smartphones mean you can monitor auctions and bid on items while you're away from your desk. And while Wingo thinks that five years from now auctions will constitute less than 10 percent of eBay's business, there are still categories—most obviously, collectibles—for which auctions make intrinsic sense. As eBay's Dane Glasgow says, "When different people have dramatically different opinions about the value of an item, and when businesses have a lack of knowledge about demand, that really lends itself to an auction." Paradoxically, auctions can also be good for moving inventory quickly, at least now that eBay has allowed sellers to run shorter auctions. Insley, whose site is called Quick Ship Electronics, relies almost entirely on no-reserve auctions—i.e., with no minimum sale price—because he knows that at the end of the day all of his goods will be sold. And for really unique items, like the lock of Justin Bieber's hair that sold recently for more than $40,000, sellers can still hope to ignite that bidder's heat.
Ultimately, if we're trying to understand the impact of online auctions on the Internet and consumer behavior, focusing too much on auctions' declining market share may miss the point. It's not just that pricing is more dynamic and more market-driven than it used to be. It's also that consumers in the post-eBay era are more empowered, more willing to hunt for low prices, and even more willing to haggle than they were before. Twenty years ago, no one would have thought of bringing the manufacturer's invoice along when buying a car; today it's common practice. As Koehn puts it, "There's been a seismic shift in the way consumers deal with businesses. Consumers now know that prices are not something that you just have to say yes or no to. They know that they can play an active part in determining what they pay. Online auctions and what they represent played a big part in teaching these things to consumers, even consumers who've never bought anything on eBay." And that, in the end, may be the real legacy of the online-auction boom and bust. It may not have changed how goods are priced, but it changed forever how they're bought and sold.
James Surowiecki was a staff writer at The New Yorker and the author of The Wisdom of Crowds.