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Paper Instructions:

eBay is the largest online auction site. Sellers pay a small fee to list their items in eBay. Items can be sold at fixed price or auctioned. Generally, auction lasts for several days and the bidders submit electronics bids. The highest bidder receives an email after the auction closed and get three business days to contact the seller. eBay provides ratings on buyers and sellers based on positive and negative comments on them. eBay has created a set up policies to guard against ‘feedback manipulation’ and ‘feedback abuse’. eBay encouraged buyers to pay through ‘PayPal’ and ‘PayPal’ provides $2000 free insurance in case the buyer doesn’t received the product or the quality of product is poorer than expected. eBay’s safety staff investigates alleged misuses at eBay such as fraud, trading offense and illegally listed items. Potential resolution is banning a seller from future trading on eBay. 

Based on the above situation answer the following questions:

1. What potential contracting problems exist on eBay? Explain.
2. What are the contracting costs at eBay? Explain.
3. eBay claims that they have small problems on fraud and misuse of the system. Does this apply that it is overinvesting in addressing potential contracting problems or underinvesting in addressing apotential contracting problems? Explain