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ONLINE AUCTIONS

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Consumer power is changing the way the world shops –

• Search

• Product information

• Price comparison

Online auctions offer an alternative service

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Two broad categories of auctions

• 3rd party• direct – bricks and mortar

Particular interest in 3rd party

Auction Overview

• In an auction, a seller offers an item for sale, but does not establish a price

• Bidders– Potential buyers

• Bids– Prices bidders are willing to pay for an item

• Shill bidders – Can artificially inflate the price of an item

English Auctions

• In English auctions, bidders publicly announce their successive higher bids until no higher bid is forthcoming

• Open auction– Bids are publicly announced

• Minimum bid – The price at which an auction begins

• Reserve price– Minimum acceptable price

English Auctions (continued)

• Yankee auctions– English auctions that offer multiple units of

an item for sale

• Disadvantages– Winning bidders tend not to bid their full

private valuations

– Bidders risk becoming caught up in the excitement of competitive bidding

Dutch Auctions

• Dutch auctions are also called descending-price auctions

• Form of open auction in which bidding starts at a high price and drops until a bidder accepts the price

• Often better for the seller

• Good for moving large numbers of commodity items quickly

Other Types of Auctions

• Sealed-bid auctions– Bidders submit their bids independently

• Second-price sealed-bid auction – Highest bidder is awarded the item at the

price bid by the second-highest bidder

• Open-outcry double auctions– Buy and sell offers are shouted by traders

standing in a small area on the exchange floor

Other Types of Auctions (continued)

• Double auction– Buyers and sellers each submit combined

price-quantity bids to an auctioneer

• Reverse (seller-bid) auctions– Multiple sellers submit price bids to an

auctioneer who represents a single buyer

– Bids are for a given amount of a specific item that the buyer wants to purchase

Online Auctions and Related Businesses

• Three categories of auction Web sites:

– General consumer auctions

– Specialty consumer auctions

– Business-to-business auctions

• Largest number of transactions occurs on general consumer auction sites

General Consumer Auctions

• Most common format used on eBay – Computerized version of the English auction

• eBay English auction– Allows a seller to set a reserve price– Bidders are listed– Bid amounts are not disclosed until after the

auction – Allows sellers to specify that an auction be

made private

Other Auctions

• Specialty Consumer Auctions e.g. Golf Club Exchange, Cigarbid.com, and Winebid

• Reverse bid– Buyer can accept the lowest offer or the

offer that best matches the buyer’s criteria• Business-to-Business Auctions e.g.

Liquidation brokers• Business-to-Business Reverse Auctions(popular with government/suppliers)

Auction-Related Services

• Auction escrow services– An independent party that holds a buyer’s

payment until the buyer receives the purchased item and is satisfied with it

• Auction directory and information services– Offer guidance for new auction participants – Offer helpful hints and tips for more

experienced buyers and sellers along with directories of online auction sites

Auction-Related Services (continued)

• Auction software

– For sellers

• Software offers services that can help with or automate tasks such as image hosting

– For buyers

• Software observes auction progress and places a bid high enough to win the auction

Auction-Related Services (continued)

• Auction consignment services

– Create an online auction for an item

– Handle the transaction

– Remit the balance of the proceeds

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Other auction sites:

Yahoo

TaoBao – 72% of China $1.7 Billion in auctions

Stuff.com.au

New Zealand

Graysonline

Amazon

And the weird

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Is Price all that matters?

Auctions have been around in one form or another forever. Most people think in terms of the highest bidder winning.

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Early research emphasis on online cost reduction over brand based

differentiation (Gilmore 1999)

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Malhotra et. al. (2002) suggests online shopping purely functional nature in contrast to catalogue shopping which delivers value in terms of customer return on investment and aesthetics

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‘The Market for Lemons,’ Quality, uncertainty and the market mechanism (Akerlof 1970)

Key issues –

• trust• quality• uncertainty• skill of the merchant to identify quality

Have auctions changed the dynamics of the ‘lemon’

TRUST

• Auctions all have buyer/seller feedback• Useful but not always reliable• Need to manage risk

VIDEO

eBay example

Who is bidding?

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Akerlof identified institutions that arise to counteract the effects of quality uncertainty. They include :

Guarantees

Risk shifting from buyer to seller

Brand names

Licensing (certification, rating etc)

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‘One of the thrills is the bidding process’(Alterio 2004)

Auction buyers may include:Passionate collectors, pragmatic bargain

hunters, time savers, or sporting ‘thrill seekers’.

So why buy at auction?

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Price

There are a number of facets to an auction but a key facet is price

Most people think in terms of the highest bidder winning.

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Features of price

Price fluctuation is the, or the determination of price, is the end result of the interplay of the forces of supply and demand.

Price is sometimes historic, but often not clear particularly for new innovative products

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Features cont.

The auction process can in theory leave everyone better off

Sometimes price may be fixed (eg Rolling Stones tickets) and people may then auction.

An alternative dynamic pricing system for supply/demand is a Dutch auction.

Good when shortage of supply

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Fluidity of pricing

Different individuals are often willing to pay more or less for the same product, leading to fluidity of pricing.

May benefit sellerReality is that different people pay different

prices for the same products all the time.Examples?Even if price stays the same discounting can

apply for individuals.

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Tools and services

• Seller on-ramp http://pages.ebay.com/startselling

• Seller central• www.paypal.com• My eBay• Want it now• Paypal

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Conclusion

The Digitalization of the transaction process and database-driven prices are becoming the norm.

Online auctions are yet another example of new business models driven by the digital economy.

Exercise• For further information on auctions refer

Chapter 6 in the text and the podcast on online auctions on the Digital Enterprise.

• Answer the questions on the wiki page (also included on the next slide)

Questions to consider:• eBay is one of the only major Internet "pure plays" to consistently

make a profit from its inception. What is eBay's business model? Why has it been so successful?

• Other major web sites, like Amazon.com and Yahoo!, have entered the auction marketplace with far less success than eBay. How has eBay been able to maintain its dominant position?

• What method does eBay use to reduce the potential for fraud among traders on its site? What kinds of fraud, if any, are eBay users most susceptible?

• eBay makes every effort to conceptualize its users as a community (as opposed to, say "customers" or "clients"). What is the purpose of this conceptual twist and does eBay gain something by doing it?

• eBay has long been a marketplace for used goods and collectibles. Today, it is increasingly a place where major businesses come to auction their wares. Why would a brand name vendor set-up shop on eBay?

(Questions sourced from ‘Managing the digital enterprise)