I agree with everyting you say Matt. In the end it's all about what you are willing to pay and how much you know about photography. If you won't use the manual or semi-manual modes and you are only selling cheap watches on the bay you might just get a P&S. On the other hand, if you are willing to learn a trick or two about taking photos and you are selling more expensive watches it might very well pay of to get a DSLR. It is much more easy to sell something on the net I you got good pictures of it.
Guysie: With on-camera flash, did you mean you used the built in one? Because the I don't know how you pulled that one off? :)