The
online auction business model is one in which participants bid for
productsThe noun product is defined as a "thing produced by labor or effort" or the "result of an act or a process", and stems from the verb produce, from the Latin prōdūce ' lead or bring forth'. Since 1575, the word "product" has referred to anything produced. Since 1695, the word has referred to "thing...
and services over the
InternetThe Internet is a global system of interconnected computer networks that use the standardized Internet Protocol Suite to serve billions of users worldwide...
. The functionality of buying and selling in an
auctionAn auction is a process of buying and selling goods or services by offering them up for bid, taking bids, and then selling the item to the highest bidder...
format is made possible through
auction softwareAuction software is application software that can be deployed as stand-alone software for commercial and/or charity live and silent auctions, that handles all aspects of conducting an auction. This software provides users the ability to register bidders, clerk sales, and cash out bidders...
which regulates the various processes involved.
Several types of online auctions are possible. In an
English auctionAn English auction is a type of auction, whose most typical form is the "open outcry" auction. The auctioneer opens the auction by announcing a Suggested Opening Bid, a starting price or reserve for the item on sale and then accepts increasingly higher bids from the floor consisting of buyers with...
the initial price starts low and is bid up by successive bidders. In a
Dutch auctionA Dutch auction is a type of auction where the auctioneer begins with a high asking price which is lowered until some participant is willing to accept the auctioneer's price, or a predetermined reserve price is reached. The winning participant pays the last announced price...
, multiple identical items are offered in one auction, with all winning bidders paying the same price -- the highest price at which all items will be sold (treasury bills, for example, are auctioned this way).
The
online auction business model is one in which participants bid for
productsThe noun product is defined as a "thing produced by labor or effort" or the "result of an act or a process", and stems from the verb produce, from the Latin prōdūce ' lead or bring forth'. Since 1575, the word "product" has referred to anything produced. Since 1695, the word has referred to "thing...
and services over the
InternetThe Internet is a global system of interconnected computer networks that use the standardized Internet Protocol Suite to serve billions of users worldwide...
. The functionality of buying and selling in an
auctionAn auction is a process of buying and selling goods or services by offering them up for bid, taking bids, and then selling the item to the highest bidder...
format is made possible through
auction softwareAuction software is application software that can be deployed as stand-alone software for commercial and/or charity live and silent auctions, that handles all aspects of conducting an auction. This software provides users the ability to register bidders, clerk sales, and cash out bidders...
which regulates the various processes involved.
Several types of online auctions are possible. In an
English auctionAn English auction is a type of auction, whose most typical form is the "open outcry" auction. The auctioneer opens the auction by announcing a Suggested Opening Bid, a starting price or reserve for the item on sale and then accepts increasingly higher bids from the floor consisting of buyers with...
the initial price starts low and is bid up by successive bidders. In a
Dutch auctionA Dutch auction is a type of auction where the auctioneer begins with a high asking price which is lowered until some participant is willing to accept the auctioneer's price, or a predetermined reserve price is reached. The winning participant pays the last announced price...
, multiple identical items are offered in one auction, with all winning bidders paying the same price -- the highest price at which all items will be sold (treasury bills, for example, are auctioned this way). Almost all online auctions use the English auction method.
Strengths of the business model
The strategic advantages of this
business modelA business model is a framework for creating economic, social, and/or other forms of value. The term business model is thus used for a broad range of informal and formal descriptions to represent core aspects of a business, including purpose, offerings, strategies, infrastructure, organizational...
include:
- No time constraints. Bids can be placed at any time (24/7
24/7 is an abbreviation which stands for "24 hours a day, 7 days a week", usually referring to a business or service available at all times without interruption. The first use of the term "24/7" was most likely in a popular song of the same name in 1989 by Dino Esposito...
). Items are listed for a number of days (usually between 1 and 10, at the discretion of the seller), giving purchasers time to search, decide, and bid. This convenience increases the number of bidders.
- No geographical constraints. Sellers and bidders can participate from anywhere that has internet access. This makes them more accessible and reduces the cost of "attending" an auction. This increases the number of listed items (ie.: number of sellers) and the number of bids for each item (e.g.: number of bidders). The items do not need to be shipped to a central location, reducing costs, and reducing the seller's minimum acceptable price
Ask price, also called offer price, offer, asking price, or simply ask, is a price a seller of a good is willing to accept for that particular good.In bid and ask, the term ask price is used in contrast to the term bid price...
.
- Intensity of social interactions. The social interactions involved in the bidding process are very similar to gambling. The bidders wait in anticipation hoping they will "win." Much like gambling addiction
Problem gambling is an urge to gamble despite harmful negative consequences or a desire to stop. The term is preferred to compulsive gambling among many professionals, as few people described by the term experience true compulsions in the clinical sense of the word...
, some bidders may bid primarily to "play the game" rather than to obtain products or services. This creates a highly loyal customer segment. This can also skew the prices of items/services/goods in the auction.
- Large number of bidders. Because of the potential for a relatively low price, the broad scope of products and services available, the ease of access, and the social benefits of the auction process, there are a large numbers of bidders.
- Large number of sellers. Because of the large number of bidders, the potential for a relatively high price, reduced selling costs, and ease of access, there are a large number of sellers.
- Network economies. The large number of bidders will encourage more sellers, which, in turn, will encourage more bidders, which will encourage more sellers, etc., in a virtuous circle. The more the circle operates, the larger the system becomes, and the more valuable the business model becomes for all participants.
- Captures consumers' surplus. Auctions are a form of first degree price discrimination
Price discrimination exists when sales of identical goods or services are transacted at different prices from the same provider. In a theoretical market with perfect information, no transaction costs or prohibition on secondary exchange to prevent arbitrage, price discrimination can only be a...
. As such, they attempt to convert part of the consumers' surplus (defined as the area above the market price line but below the firm's demand curve) into producers' surplusIn economics, economic profit is the difference between a company's total revenue and its opportunity costs. It is the increase in wealth that an investor has from making an investment, taking into consideration all costs associated with that investment including the opportunity cost of...
.
Criticism
Auction sites, like garage sales, flea markets, classified advertisements and other independent sales venues, sometimes draw criminals wishing to sell stolen products, but for law enforcement organizations, finding stolen goods offered online is sometimes easier than more traditional detection methods.
Some criticism is leveled at online auction websites for uneven representation of items offered for sale. Descriptions may omit important information, and photos may not be adequate. Potential bidders can typically protect themselves by reading the text, studying photographs and asking questions of the seller before bidding. Studies show that a large proportion of unsatisfactory online purchase experiences are the result of careless consumerism.
In the U.S., large retailers have lobbied Congress to require online auction sites to share private sales information about sellers, citing potential illegalities. Within the online auction community this is commonly viewed as an attempt at unfair market protection and trade restraint. Reduced overhead sometimes enables independent online sellers to offer goods at lower prices than large retailers.
Online auction selling has attracted millions of laid-off workers, as well as the disabled, parents of young children, retirees, pensioners and others that are unable to find employment in the mainstream workforce. Online auction venue corporations are accused of engaging in discriminatory trade practices that unfairly impact such customers. Presently, the trading practices of online auction venue corporations is not regulated by state or federal agencies.
Companies that use the model
- Allegro
- Apex auctions
Apex Auctions are a Brighton-based auctioneer who specialize in auctioning CNC and manual machine tools from engineering companies in the UK, US and Europe.In 2007 the company negotiated the sale of the world-famous Swan Hunter shipyard.- References :...
- Bidorbuy
Bidorbuy is South Africa's largest internet auction website, run by bidorbuy Ltd. Andy Higgins founded the site in August 1999 when the South African site was first launched...
- Bidtopia
Bidtopia is an online auction site originally launched as a sole platform for Bargainland, a company that was the largest eBay seller in 2007...
- The Debt Exchange
- eBay
eBay Inc. is an American Internet company that manages eBay.com, an online auction and shopping website in which people and businesses buy and sell a broad variety of goods and services worldwide. A majority of the sales take place through a set-time auction format, but subsequent methods include...
- eBid
eBid is an online auction website founded in December 1998. eBid operates in eighteen countries, United Kingdom, United States of America, Canada, Australia , Ireland, Italy, France, Germany, Spain, Netherlands, Denmark, India, Norway, New Zealand, Portugal, Sweden, Singapore, South Africa...
- GunBroker.com
Gunbroker.com is an Atlanta, Georgia United States based auction website specializing in the sale of firearms. It was founded in 1999 by Steven F. Urvan, who serves as the CEO and Chief Technology Officer. Its Chief Operating Officer is Donald Hall...
- Heritage Auction Galleries
Heritage Auction Galleries advertises itself as the world's largest collectibles auctioneer and the third largest auction house, with over $700 million in annual sales and 450,000 online bidder-members....
- Hobby Markets Online
Hobby Markets Online was an early internet auction company internet auction company and which ran a series of person-to-person marketplaces for high-end collectibles...
- Lixtor
Lixtor is an Internet-auction website operating in New Zealand since 2005, as a free alternative to currently dominant "paid" online-trading website in New Zealand, TradeMe....
- MercadoLibre.com
MercadoLibre.com or MercadoLivre in Portuguese is a website dedicated to online auctions. It is eBay's Latin American partner. MercadoLibre is Latin America's number-one auction site...
- Overstock.com
Overstock.com is an online retailer headquartered in Cottonwood Heights, Utah, near Salt Lake City. Founded in 1997 by Robert Brazell, under the name D2: Discounts Direct, it pioneered the online sale of surplus merchandise. It now features a combination of surplus, returned, and new items.The...
- Oztion
OZtion is an online auction site designed for Australians. OZtion is the second largest auction site in Australia. The OZtion website, based in Melbourne, was founded in 2005 by Philip Druce and Kelvin Yip...
- Prosper.com
- SalvageSale, Inc.
- Swoopo
Swoopo is an online auction site where purchased credits must be used to make bids. Previously to changing its name to Swoopo in 2008, the website was called Telebid...
- TradeMe
Trademe, managed by the company Trade Me Ltd, is the largest Internet-auction website operating in New Zealand as of . New Zealand entrepreneur Sam Morgan founded the site in 1999, and after some years of overall dramatic growth sold it to Fairfax in 2006 for NZ$750 million...
- Tradus
Tradus is an online auction company that operates in Europe. The company, a subsidiary of South African media group Naspers since March 2008, operates across Europe using many different brands.-History:...
(former QXL)
- uBid
uBid Inc., Symbol: ENAB, manages an online auction and shopping website that offers both goods sold directly by the company and items sold by pre-approved uBid Certified Merchants. It is currently the 2nd largest online auction site by sales volume and is only available to US residents...
- Yahoo!
Yahoo! Inc. is an American public corporation headquartered in Sunnyvale, California, , that provides Internet services worldwide...
See also
- Auction sniping
Auction sniping is the process of watching a timed online auction , and placing a winning bid at the last possible moment , giving the other bidders no time to outbid the sniper. Some bidders do this manually, and others use software designed for the purpose...
- Online auction tools
Online Auction tools is application software, that can either be deployed on a Web server or a Desktop. This software is used by customers of online auctions such as Ebay or Oztion....
- Bidding fee scheme
A bidding fee scheme, also known as pay per bid auction, is type of auction where participants pay a fee for every bid that they place on a timed auction. Each bid raises the price of the auction by a fixed amount and extends the time of the auction...
- Auto auction
- Marketing
Marketing is an integrated communications-based process through which individuals and communities are informed or persuaded that existing and newly-identified needs and wants may be satisfied by the products and services of others....
- Reverse auction
A reverse auction is a tool used in industrial business-to-business procurement. It is a type of auction in which the role of the buyer and seller are reversed, with the primary objective to drive purchase prices downward...
- Auction software
Auction software is application software that can be deployed as stand-alone software for commercial and/or charity live and silent auctions, that handles all aspects of conducting an auction. This software provides users the ability to register bidders, clerk sales, and cash out bidders...
- Strategic management
Strategic or institutional management is the conduct of drafting, implementing and evaluating cross-functional decisions that will enable an organization to achieve its long-term objectives...
- Tenders
A call for bids or call for tenders or invitation to tender is a special procedure for generating competing offers from different bidders looking to obtain an award of business activity in works, supply, or service contracts...