For people who already have a storefront, or were considering it, eBay is cheap. For people who only do this because the current (old) pricing makes it feasible, the comparison is to not selling at all.

I think part of what makes eBay work is the network effect. People assume that if it can be bought, there's a seller on eBay; if it can be sold, there's a buyer.

As a buyer, I don't care if the person on the other end has a storefront, or if they work out of their mother's basement. Lots of people doing it full time are basically specialized aggregators: they collect stuff that is too low volume or low value to make a store worthwhile and list it. Their value is in their expertise at finding things that the current owner doesn't know the value of, or doesn't want to invest the marketing in, and bringing it to a receptive market.

If eBay raises prices to a point that they're "competitive" with a physical storefront -- as opposed to being a bargain -- they may make more from the larger operations but the low end will disappear or move to a new bargain service.

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[edit]

Oh, and two words: Google Auctions.

I remember reading somewhere ... (Hmm, who was it saying this ... ?) that Amazon isn't really a retailer so much as they are a supplier of online retailing software and services. If you want a storefront, Amazon makes it easy. If you then want to list in an auction (or dutch auction) then you go to eBay and point it to your Amazon store.