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Tuesday, November 1, 2005

eBay - Welcome to the World of a Class B Misdemeanor
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We use auctions at the Institute for Regulatory Law & Economics to teach state regulators about how prices emerge and markets work. They are a great teaching tool. To my surprise, the proximity of state regulators to auctions is closer than I ever imagined. CNN reports that the North Dakota Public Service Commission may require eBay sellers to get an auctioneer's license. From CNN:

To get a North Dakota auctioneer's license, applicants must pay a $35 fee, obtain a $5,000 surety bond and undergo training at one of eight approved auction schools, where the curriculum includes talking really fast.

Mind you, this is a license to certify expertise in reading facial tics and absurd hand gestures while managing the tensions associated with an excited crowd of bidders. In my experience, the human drama on display at your typical eBay auction is, well, a bit milder. Violators of the licensure rules face prosecution of a Class B Misdemeanor. We're talking about a $1,000 fine and up to 30 days in the pokey.

I know some of the commissioners from North Dakota. They are reasonable people who are fully acquainted with digital technologies such as the Internet and eBay. They do not regulate everything for the sake of regulation. The stereotype of a renegade regulator creating make-work does not fit this story. These folks believe in markets and try to make reasonable decisions about the role of the state. What's more, they understand the idea that regulation can serve as an entry barrier and create unfair protections for incumbents (in this case, auctioneers).

So, what gives? There is no apparent harm to consumers on eBay. There is little to suggest that buyers who deal with sellers like this guy are worse off than buyers who deal with licensed auctioneers. Quite to the contrary, eBay, and the community of people who frequent its site, has developed an extensive set of policies and behavioral norms to protect both buyers and sellers.

I've discounted the idea of renegade regulators. There doesn't appear to be a need for the licenses. Perhaps it is simply a case of public officials having their hands tied in a case of old law meets new technology? Let's look at the law. Chapter 51-05.1-04 of the North Dakota statutes defines an auctioneer in the following way:

An auctioneer within the meaning of this chapter is a person, who for a compensation or valuable consideration, sells or offers for sale either real or personal property at public auction as a whole or partial vocation.

The North Dakota PSC has jurisdiction over the citizens of their fair state, and likewise for property. I guess I wonder "where" an auction takes place if it is done online by virtue of some clever software code.

Still perplexed, I called Bismark to learn more about the situation. It turns out that the story has a couple more twists. Indeed it is a case of old law meets new technology, but there is also a dose of good citizenship and political strategy involved.

The whole episode developed when a man in Crosby, North Dakota, wanted to sell an antique car. With a population of 1,089, the demand in Crosby for antique cars is relatively low. Our potential seller turned to eBay and successfully sold the car. As chance would have it, the seller also came across an obscure reference to the state's auctioneering requirements and, not wanting to get on the wrong side of the law, inquired at the PSC. A good citizen indeed. The inquiry produced little in the way of instruction because the commission staff had no experience with "eBay auctioneers" and in order to play it safe, eventually advised him to register as an auctioneer.

The Precautionary Principle at work: When in doubt, extend the regulation at the margins just to be safe. Assume potential benefits from the regulation and ignore potential costs. After all, who would put in place a regulation with costs greater than its benefits?

The second twist is political. The ND PSC has asked for an advisory opinion from the state attorney general. General Wayne Stenehjem is looking into the matter. PSC President Tony Clark has indicated skepticism toward regulation of eBay sellers in the press. Clark observes that traditional auctions require buyers and sellers to gather in one place -- presumably in North Dakota -- while online auctions can involve people in many places and jurisdictions.

To a casual observer, it looks as if politically savvy regulators know that they cannot change the law on their own accord and rather than enforce a regulation that contravenes commonsense, they have punted the issue to the attorney general. One of three outcomes is likely.

General Stenehjem could rule that the PSC must enforce the rule. This is a political loser for all involved and will invite a backlash from the legislature next year. General Stenehjem could take his time in the development of a ruling which effectively stays any enforcement action, perhaps long enough for a new legislature to change the statute. Or, General Stenehjem could issue a ruling that advises against the application of auctioneering regulations to eBay sellers.

All of this begs the question: What is the purpose of auctioneer licensure? I suspect that at one time it was thought that unscrupulous auctioneers could take advantage of unsuspecting buyers or sellers who were disadvantaged by circumstance. However, if the eBay phenomenon shows us anything it highlights the robustness of private consumer protection standards and procedures. EBay has a huge investment in the maintenance of fair and honest dealing through its site. Buyers and sellers invest in their "eBay Reputation." When the North Dakota legislature looks at auctioneering licensure next year, as I'm sure they will, it may be time to eliminate all of the regulations.

I have no beef with auctions or auctioneers. As I noted above, auctions are a great market institution. As a kid, my grandfather would entertain us by talking about the weather, our dinner plans, or his new car in the staccato, rapid-fire tongue of a cattle auctioneer. I assure you that as a child, this was hilarious. Although he was never licensed, he had developed the skill from participating in countless auctions as he moved cattle between Kansas City and Chicago during the early and middle 20th century. In a pinch, he could substitute for an auctioneer at a cattle sale.

In the past, information and search costs were much higher and auctions ameliorated the problem. The auctioneer would collect and distribute price information among many people. The auctioneer would vouch for the value of the goods and the performance of a sales contract. It is for this latter reason that auctioneers are bonded. These auctions were specialized institutions with a command and control regulatory regime. Experts were regulated in the "public interest."

Digital technologies have dramatically changed our markets. The skills and knowledge necessary to buy and sell cattle are widely disbursed across the Midwest just as the knowledge -- including the institutions like eBay -- to buy and sell all manner of goods has been decentralized to Internet users around the world. Auctions are still important but less as a locus of expertise and more as a tool to bring distant buyers and sellers together. Auctions have changed because the behavior of buyers and sellers changed.

It is time to do the same for the regulatory regime.

Little Known Auction Fact: People who have completed Auctioneer School commonly use the title Colonel. The title is honorific and refers to the Civil War practice of Colonels being called upon to auction off the spoils of war.

posted by @ 1:12 PM | E-commerce , Economics , State Policy

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