Markets fail to produce socially desirable outcomes (maximizing consumer welfare) in
four situations: information asymmetry, monopoly power, public goods, and externalities.
Online and offline auction markets can be prone to fraud, which produces information asymmetries between sellers and buyers and among buyers, which in turn
causes auction markets to fail (see Table 11.10). In the past, according to the Internet
Crime Complaint Center (IC3), Internet auction fraud was one of the top 10 types of
fraud but in 2012 it represented only 10% of total Internet fraud in part because other
Internet crimes had grown so rapidly. Auction-auto fraud scams were the most frequently reported, with more than $8.8 million in losses, and an average reported loss
of more than $2,400 (National White Collar Crime Center/FBI, 2013).
eBay and many other auction sites have investigation units that receive complaints
from consumers and investigate reported abuses. Nevertheless, with millions of visitors
per week and hundreds of thousands of auctions to monitor, eBay is highly dependent
on the good faith of sellers and consumers to follow the rules.