KWIT

Why Middlemen Are Taking Over The Global Economy

Sep 16, 2016
Originally published on September 16, 2016 6:55 am
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DAVID GREENE, HOST:

One of the great promises of online shopping is its ability to keep prices down by cutting out the middleman. Well, now it appears the middle man has elbowed his way into the online sales experience. Here's Stacey Vanek Smith from our Planet Money podcast.

STACEY VANEK SMITH, BYLINE: Fred Ruckel and his wife, Natasha, make the Ripple Rug. It's a cat toy. It looks like a rumpled up carpet with holes cut in it.

So who is this?

FRED RUCKEL: Well, she can introduce herself, but this is Yoda.

VANEK SMITH: Hey, Kitty. Will you say something?

Yoda would not. But she did spend a lot of time crawling in and out of the holes in the Ripple Rug. Apparently, a lot of cats do. When the Ruckels put their product on the Amazon Prime marketplace, they sold $60,000 worth of rugs every month at 40 bucks each. But then, one day, Fred's brother-in-law called him and said someone else was selling Ripple Rugs on eBay.

(SOUNDBITE OF ARCHIVED BROADCAST)

RUCKEL: I just typed in the Ripple Rug on eBay, and there was already four sellers selling the Ripple Rug. And then every single day, there would be five more, six more, 10 more.

VANEK SMITH: How much were they charging?

RUCKEL: They were going as high as 59.99.

VANEK SMITH: Twenty dollars more than Fred was charging on Amazon. People were scalping Ripple Rugs. Fred started calling the rug scalpers and telling them to stop.

(SOUNDBITE OF ARCHIVED BROADCAST)

RUCKEL: I am Fred from SnugglyCat, the makers of the Ripple Rug, and I'm calling you about you selling our product illegally. And, you know - I'm not selling it illegally - and they hang up.

VANEK SMITH: Actually, the eBay sellers were right. What they're doing is legal. It's called arbitrage. That's when you buy something at one price, turn around and sell it somewhere else at another price. But this was arbitrage with a twist because these eBay sellers never actually touched a Ripple Rug. They would advertise it and wait. When they sold one, they would buy it from Fred Ruckel's Amazon store for a lower price, have it shipped directly to their customer and pocket the difference. They never owned the rug. They took on no risk.

(SOUNDBITE OF ARCHIVED BROADCAST)

NIKKI WITHERSPOON: It's just too easy.

VANEK SMITH: Nikki Witherspoon doesn't sell the Ripple Rug, but she sells lots of other cat toys and household products on her eBay store. She has software that finds arbitragable products on Amazon, copies the images and posts them to her eBay store.

(SOUNDBITE OF ARCHIVED BROADCAST)

WITHERSPOON: And now it's really just a matter of pressing a button, and your store is kind of ran for you.

VANEK SMITH: Did you ever feel like we're not actually doing anything? You know what I mean? Like, you're not adding anything to the product. Did you feel weird about that?

(SOUNDBITE OF ARCHIVED BROADCAST)

WITHERSPOON: Not really, honestly - it does require some work.

VANEK SMITH: Like advertising - Nikki says the ad she buys helps Amazon vendors sell more. And Fred Ruckel was selling more Ripple Rugs because of the arbitrageurs. But there was a problem - returns. EBay buyers would get their Ripple Rug delivered in an Amazon box, and they'd check Amazon and figure out that they'd paid $20 more than they had to. They'd return the rug on Fred Ruckel's dime.

RUCKEL: Made us have over 200 returns, which was over 10,000 in losses in just a couple of months.

(SOUNDBITE OF ARCHIVED BROADCAST)

VANEK SMITH: You lost $10,000 in two months?

RUCKEL: In two months.

VANEK SMITH: Fred pulled the Ripple Rug off of the Amazon Prime marketplace in May. Sales fell by more than half. Fred says it was worth it. The arbitrage has stopped. He's less stressed, and he has only had two returns.

But most vendors won't take that hit, and online arbitrage is booming says Jason Feifer of Entrepreneur magazine. Jason says we don't want to take the time to click around and compare prices on different websites, and the arbitrageurs cash in on our laziness.

JASON FEIFER: All I have to do is go to another website and see the price is different, and I don't. It's crazy. Like, why am I not doing that? We're the problem.

VANEK SMITH: Amazon didn't comment for the story. EBay says arbitrage is not against its rules. Stacey Vanek Smith, NPR News. Transcript provided by NPR, Copyright NPR.