FTC Staff Comment to the Honorable Noble E. Ellington Concerning Louisiana S.B. 642 to Define More Clearly the Type of Seller That Must be Licensed as an Auctioneer

UNITEDSTATESOF AMERICA
FEDERAL 	COMMISSION	TRADE
Washington, DC 20580
Office of Policy Planning
Bureau of Competition
Bureau of Consumer Protection
Bureau of Economics
May 26,2006
The Honorable Noble E. Ellington
Louisiana State Senate
P.0 Box 94183
Baton Rouge, LA 70804
Dear Senator Ellington:
The staffs of the Federal Trade Commission's ("FTC" or "Commission") Office
of Policy Planning, Bureau of Consumer Protection, Bureau of Economics, and Bureau of
competition1 are pleased to respond to your request for comments on Louisiana Senate
Bill 642 ("SB 642" or the "Bill"), which would "define more clearly the exact nature of
the type of seller who must become licensed as an auctioneer." The FTC has
considerable experience in analyzing both consumer protection and competition issues
related to Internet auctions and online ~ommerce.~	Based on our experience, we believe
that, if enacted, SB 642 will enhance consumer welfare by reducing barriers to entry in
the provision of online auction and retail services and thereby expanding consumer
1 	This letter expresses the views of the Federal Trade Commission's Office of Policy Planning,
Bureau of Competition, Bureau of Consumer Protection and Bureau of Economics. The letter does not
necessarily represent the views of the Federal Trade Commission or any individual Commissioner. The
Commission has, however, voted to authorize us to submit these comments.
2 	The FTC is the leading U.S. consumer protection agency and works with auction websites such as
eBay and the states to combat fraud and related problems in Internet auctions. It provides help to buyers
and sellers to navigate potential pitfalls of using the Internet and Internet auction sites. See ONGUARD
ONLINE,http://onguardonline.gov/auctions.html and INTERNET 	A GUIDE 	AND	AUCTIONS: 	FOR BUYERS
SELLERS,h~://www.ftc.govlbcplconlinelpubs/onlinelauctions.pdf.	Note that there are a number of
Internet auction houses, including Yahoo!, Amazon and Ubid. The FTC7sBureau of Economics recently
hosted a roundtable on the economics of Internet auctions. See Internet Auction roundtable Web site at
h t t p : / / w w w . f t c . g o v / b e / w o r k s h o p s / i n t e ~ .The FTC also hosted a conference
on the anti-competitive barriers to e-commerce. See E-commerce Workshop Web site at
~ ~ : I / w w w . ~ ~ c .	g~~/~pp/e~~mmer~e/antic~mpetitive/index.htrn.

choice. We also believe the Bill will not increase the risk of consumer harm from auction
fraud.
The Proposed Legislation
Current Louisiana law defines an auction as "[the sale by] competitive bid on any
property."3 Based on its interpretation of this definition, the Louisiana Auctioneer' s
Licensing Board ("LALB") recently began to require online auction house Trading
Assistants ("TAs") to have either an auction business license or an auctioneer's license to
operate. A consumer delivers his or her merchandise to a TA, who then sells it through
an online auction house in return for some compensation, typically a percentage of the
final sales price, although compensation schemes vary. TAs include individuals helping
with a few transactions a year, large businesses with bricks and mortar locations, and
online auction drop-off store^.^ It is our understanding that the LALB would require TAs
to pay an annual license fee of $300, buy a $10,000 surety bond, and, if required, to
obtain an auctioneer's license, receive the necessary education, training, and continuing
education.
The Bill would change the definition of auction by adding qualifying language to
the existing statutory definition:
"Auction" means the sale by competitive bid on any property which sale consists
of a series of invitations for offers to purchase property made by the auctioneer
and offers to purchase made by members of the audience culminating in the
acceptance by the auctioneer of the highest or most favorable bid.6
It is our understanding that this proposed change would exempt fiom LALB's licensing
requirements businesses and individuals that offer property through online auction houses
exclusively.7
3 	37 LA. REV. STAT.ANN. 5 3103 (A) (3). bbAuctioneer"means any person who, for another, with
or without receiving or collecting a fee, commission, or other valuable consideration, sells or offers to sell
property at an auction. Id. at 	3 103 (A) (4).
4 See John Hill, Louisiana, eBay Bidding War of Words, SHREVEPORT	TIMES,Apr. 11,2006, at
h ~ : / / s h r e v e p o r t t i m e s . c o m l a p p s / p b c s . d l D 0 0 6 0 41l/NEWSO116041203131-11LEGISLATUR.
5 To be licensed as an auctioneer in Louisiana, the person must have completed "[a] series of studies
at a school of auctioneering licensed or approved by the board" or "[aln apprenticeship of one year working
with and under an auctioneer duly licensed in the state of Louisiana." 37 La.sec. 3 113 (A) (4) (a-b). The
approved schools are listed at http://www.lalb.org/schools.htm.
7 For example, sales via online auctions would be excluded fiom this definition because there is no
auctioneer who makes "a series of invitations for offers." This definition is similar to the definition used in
Tennessee (62 Tenn. § 19-101 (2)). The Tennessee Attorney General recently wrote that the Tennessee
Auctioneer Commission does not have authority over Internet auction drop-off stores. Further, one
interpretation of the detailed opinion is that the Tennessee law does not cover Internet auction house

Competitive Effects of Proposed Legislation
By clarifying who needs to be licensed as an auctioneer or auction business, SB
642 will exempt fiom licensing requirements businesses and individuals who facilitate
the use of online auction houses. This change will remove a barrier to entry (recently
erected by the LALB), increasing consumer choice and likely leading to lower prices for
TA services and concomitantly greater availability of goods from Louisiana for buyers in
Louisiana and elsewhere.
The current requirement that TAs obtain an auction business or auctioneer's
license is likely to increase the price that TAs in Louisiana charge for their service. First,
it is likely that TAs will pass on a portion of the increased costs that they must incur as a
result of licensing requirements to consumers in the form of higher prices. Further, if the
total licensing costs are significant, some TAs and others may stop providing online
auction and retail services altogether. If the current LALB policy reduces the number of
TAs, the price of those services is likely to rise, making both potential sellers and
potential buyers worse off. The presence of fewer competitors may reduce competition
on price and quality among TAs and increase market power for market participants.8
TAs provide a valuable service to those who want access to online markets, but
prefer not to sell goods themselves through online auction house^.^ Further, given their
relative experience using online auction houses, TAs are likely to be able to sell goods
more effectively than their clients, by, for example, choosing the best mode to sell a
particular item.'' 	Standard economic theory also suggests that businesses such as TAs
Trading Assistants. See Tennessee Attorney General Opinion No. 06-053 (March 27,2006), at
http://www.attorneyaeneral.state.tn.us/op/2006/OP/OP53.pdf.
8 Standard,economicreasoning suggests that free entry will allow the market price to fall to where
the market demand is covered by the most efficient suppliers (see ROBERTPINDYCK& DANIELRUBINFELD,
MICROECONOMICS	ch. 8 (5" ed. 2001)). A number of standard economic theories suggest that a small
number of competitors or reduced geographic or differentiated product competition will lead to higher
prices. See id. at ch. 12.
9 	A number of studies have found that high feedback scores are associated with higher revenue for
sellers. On eBay, feedback can be given after each transaction. The feedback includes a positive, negative,
or neutral rating and written comments. eBay tracks and publishes the aggregate feedback score where a
positive is equal to 1, a negative to -1 and a neutral is 0. To the extent that sellers can choose TAs with
higher feedback scores this may lead to higher returns than these sellers could have received selling directly
on eBay. See, e.g., Paul Resnick et al., The Value of Reputation on eBay: A Controlled Experiment, at
http://www.si.urnich.edu/-presnicMpapers/postcards/. According to eBay, "To be included in the Trading
Assistant Directory and have access to Trading Assistant marketing materials, you must have (1) sold at
least 10 items in the last 90 days, (2) a feedback score of 100 or higher, (3) 97% positive feedback or
higher, and (4) your eBay account must be in good standing." For fiuther information see eBay, Trading
Assistant Program, htt~://~a~es.ebay.com/tahub/index.html.
10 eBay and other Internet auctions provide numerous methods and mechanisms for selling items.
For example, on eBay, not only is there the standard auction format, but there are also fixed price options
(also known as "Buy-It-Now"), Best-Offer options, eBay Stores and eBay Express, plus combinations of

that specialize in selling items on online auction houses will be able to achieve lower
costs relative to infrequent sellers through the purchase of capital equipment and access
to larger buying volumes.
If TA services are more expensive, fewer goods and services will end up for sale
in online auction houses. Online auction houses provide a national, or even international,
market for products that may have only traded locally prior to the Intemet.12 By allowing
bidders throughout the United States to bid on goods offered for sale in Louisiana, online
auction houses may lead to large gains from trade to consumers in Louisiana and
elsewhere.13 Online auction houses allow items to be traded to the people who want the
goods the most, irrespective of where those people live.14 By decreasing Louisiana
residents' use of online auctions houses, the LALB7spolicy is likely detrimental to sellers
in Louisiana and, by reducing the supply of goods fiom Louisiana available through
online auction houses, to buyers in Louisiana and elsewhere.
Further, to the extent that TAs place competitive pressure on established
auctioneers, the current LALB policy may increase the price that some consumers pay for
traditional auctioneers' services. In particular, this may occur if traditional auctioneers
the above. Internet auction sellers also have options on the length of the auction, the minimum bid amount,
whether to use a hidden reserve, and the amount of the hidden reserve. See Robert Zeitharnrner, When is
Auctioning Preferred to Posting a Fixed Selling Price, at
http://asbwww.uchica~o.edu/fac/robert.zeithaer/researcactioned	goods sept 05.pdf.
11 	For example, TAs are likely to own shipping equipment and purchase relatively large levels of
shipping services.
12 See, e.g., Christopher Adams et al., 'Vettes and Lemons on eBay (finding that the average bidder is
willing to travel 700 to 800 miles to purchase a used car), at
http://papers.ssrn.com/sol3/par>ers.cfm?act 	id=880780.
13 	For example, eBay, the leading online auction house, has 72 million active users, including one
million TAs, participating in auctions valued at $22 billion in 2005. See ebay Unaudited Supplemental
Operating Data at http://investor.ebay.comldown1oads/fi1ndMetrics.pdf. Further, it was recently
estimated that eBay contributed $6.5 billion annually to consumer welfare. Ravi Bapna et al., Consumer
Surplus in Online Auctions, at htt~://~a~ers.ssrn.com~sol3/~a~ers.ch?abstract	id=840264. See also
Bapna presentation at the Internet Auction Roundtable at
htt~://www.ftc.gov/be/worksho~s/internetauction~ravibapnaslides.~df.	In Louisiana, eBay has 460 TAs and
approximately 1,500 people making a full or part-time living from eBay.
14 eBay's standard auction format allows bidders to bid "as if' they are attending a live auction
without the need to actually attend and without having to bid as the auction progresses. This format gives
sellers access to bidders in all parts of the country and in all time zones. eBay uses a "proxy bidding"
system where the bidder enters the highest amount he or she is willing to pay and the system sets the price
at the second highest proxy bid. William Vickrey won the Nobel Prize in Economics in part for the
realization that bidders will behave in a similar manner in an eBay-style auction as they will in a standard
live auction. The equivalence between sealed-bid second price auctions and "English" auctions has been
independently discovered on a number of occasions. See David Lucking-Reiley, Vickrey Auctions in
Practice: From Nineteenth-Century Philately to Twenty-First-Century E-Commerce, 14 J. ECON.
PERSPECTIVES	183 (2000).

compete with TAs by offering online auction and retail services. Auctioneers or auction
businesses that have already satisfied the licensing, insurance and education requirements
can provide online auction and retail services without concern about competition from
unlicensed TAs.
Consumer Protection Issues Related to Online Auction Houses
FTC staff works with online auction houses and the states to reduce fraud
associated with Internet auctions and to educate consumers on the risks associated with
using Internet auctions.15 The FTC also hosts the Consumer Sentinel database, which
collects information on consumer complaints. Consumer Sentinel data show that fraud in
Intemet auctions is one of the largest sources of consumer complaints received by the
FTC?
We are not aware of any particular consumer protection problem with TAs in
Louisiana, and it is unlikely that requiring TAs to become licensed auctioneers or
licensed auction businesses will address the most serious fraud-driven consumer
complaints associated with Internet auctions -that sellers fail to send the merchandise.17
15 	The FTC has issued extensive education for both Internet auction sellers and buyers. Some of the
tips the FTC offers buyers on how to avoid falling prey to Internet auction fraud include: (1) becoming
familiar with the auction site and its protections for buyers; (2) before bidding, researching the seller and
avoiding doing business with sellers who try to lure a buyer off the auction site with promises of a better
deal; (3) being cautions about escrow or online payment services that are unknown or have no functioning
contact information; (4) protecting privacy by not providing personal or financial information until
ensuring the legitimacy of a seller or payment service; (5) saving all transaction information; and (6)
contacting the FTC or state attorney general's office if problems cannot be resolved.
16 	However, Consumer Sentinel complaints are self-reported, and the volume of these complaints do
not correlate to the actual frequency of consumer problems. In 2005 there were approximately 80,450
complaints received by the FTC regarding Internet auctions (http://www.ftc.gov/opa/2006/01/topten.htm).
In comparison, there were approximately 1.9 billion items listed on eBay alone (see
http://investor.ebay.corn/downloads/~ndMecs.pd. That is, there was an average of one complaint for
every 23,000 items listed. For a discussion of this issue presented at the Internet Auction Roundtable see
Keith Anderson, Internet Auction Fraud: What can we learnfrom Consumer Sentinel data?, at
http:Nwww.ftc.nov/be/workshops/internetauction/keithandersonslides.pdf. For more recent estimates of the
frequency of problems on eBay see Chris Dellarocas & Chris Wood, The Sound of Silence in Online
Feedback: Estimating Trading Risks in the Presence of Reporting Bias, at
http://clients.pixelloom.info/WISE2005/papers/16l.pdf.
17 	For a discussion of complaints from the FTC's Consumer Sentinel database see OnGuard Online
Web site at h~://onnuardonline.nov/auctions.html#fiaud.Other complaints about Internet auctions
include: sellers who send something of lesser value than advertised; sellers who fail to deliver in a timely
manner; sellers who fail to disclose all relevant information about a product or terms of the sale; bid
siphoning; second chance offers, shill bidding and bid shielding. For 2005, Louisiana ranked 48 among the
50 states with approximately 80 total fraud complaints in the Consumer Sentinel per 100,000 people in the
population. In 2005, Louisiana had 750 fraud complaints associated with Internet auctions in the Consumer
Sentinel. This represents about 20% of all Louisiana fraud complaints in the database, which is slightly
lower than the national average of about 25% (see Anderson presentation). The Consumer Sentinel collects
consumer complaints from numerous sources and on numerous topics. For more information see
Consumer Sentinel Web site at http:Nwww.consumer.p;ov/sentinell. The Louisiana Auctioneers
Association (letter dated May 9,2006) states that the $10,000 surety bond could be used to pay restitution

Recently, problems involving non-shipment of merchandise have occurred with
fraudsters fiom overseas stealing legitimate eBay accounts and eBay user IDS."
To the extent that TAs have high feedback ratings, removing them fiom the
market may actually make consumers worse off.lg Recent academic studies suggest eBay
sellers with high feedback scores are more likely to provide accurate information and are
less likely to commit fraud.20Moreover, to the extent that TAs rely heavily on having a
good feedback score for continued business, TAs are less likely to provide poor
information or commit fraud. Further, to the extent that TAs have physical locations and
brand names, they would have even less incentive to harm or mislead consumer^.^' If
licensing were voluntary for TAs, they may have an incentive to become licensed
auctioneers or licensed auction businesses to signal their trustworthiness to potential
sellers and buyers. Voluntary memberships in the Better Business Bureau or voluntary
licensing as an auctioneer or an auction business are two ways for TAs to establish trust
with potential clients and customers.22
Conclusion
Consumers in Louisiana benefit from the use and availability of TAs. The
LALB's requirement that TAs become licensed auctioneers or licensed auction
businesses is likely to harm consumers by reducing choice and increasing prices.
Although there may be legitimate consumer protection concerns associated with auction
fraud, the LALB7saction does not seem to be tailored to such concerns. Based on our
review, FTC staff believes that if enacted, SB 642 is likely to enhance consumer welfare
in Louisiana.
We appreciate the opportunity to present our views. Please do not hesitate to
contact us about this issue.
to a consumer (presumably a consumer who is a buyer) for a fraudulent sale. While a surety bond could
protect those buyers, there are other protection mechanisms available to buyers in the online auction
marketplace.
18 See, e.g., Benjamin Sutherland, Swimming With Sharks, NEWSWEEK	INT'L(March 27,2006), at
http://www.msnbc.msn.cornlidll1900480/site/newsweeW.
19 	See note 9, supra, for an explanation of feedback ratings.
20 See, e.g., Ginger Jin, Price, Quality and Reputation on eBay, Presented at FTC Internet Auction
Roundtable (Oct. 27,2005), at h t t p : / / w w w . f t c . ~ o v / b e / w o r k s h o p s / i n t e ~
21 	When there are information problems in a market, reputations and brand names may play an
important role in building trust with customers. See, e.g., James Lacko, PRODUCT	QUALITY&
INFORMATION 	FTC Bureau of Economics Staff Report (Jun. 1986).	IN THE USEDCARMARKET,
22 	Standard economic reasoning, dating back to work by Nobel Laureate Michael Spence, suggests
that if there are higher costs to hucksters becoming licensed auctioneers relative to honest service
providers, then voluntarily becoming a licensed auctioneer sends a signal of quality to potential sellers and
buyers. See Michael Spence, Job Market Signaling, 87 Q. J. ECON.355 (1973).

Respectfully Submitted,
Maureen K. Ohlhausen
Director, Office of Policy Planning
Michael A. Salinger 	f l
Director, Bureau of Economics
Jeffrey schmidt
Director, Bureau of Competition
Director, Bureau of Consumer Protection