Online auctions

Term Paper, 2001

12 Pages, Grade: 8 of 10

Free online reading

Table of Contents


The business model of auctions

The bidding process

Types of auctions

Supplier Utility
Customer Utility

The Case of Ebay




Today the necessity of E-commerce for growing companies has not to be discussed anymore. Companies try to create some added value towards their customers to keep them satisfied on a higher level. The fact that most companies commence doing business on the internet will lead to a great variety of commercial web pages, such as auction pages. Online auctions can be the core business of a company (, an additional business ( or can be an added value to the already existing off-line firm (

The Internet gives revolutionary perspectives to the business model “auction”. An auction is not longer a geographically pre-determined market place on that rare pieces are offered to collecting people. By the elimination of cost factors space and time, the Internet offers a theoretical basis for a dynamic market place where everyone at each time can occur as seller or buyer.

In this paper the role of online auctions is discussed by introducing online auctions and comparing revenues and costs of an online auction for suppliers and customers. At the end of the paper a conclusion is given.

The business model of auctions

Online auctions are nothing but conventional auctions like Sotheby’s or Christie’s in London conducted online. There is dealt with products and services for which the conventional marketing channels are ineffective or inefficient (Turban, 2000).

The role of the online auctioneer, which provides a network function, is to formalize trading procedures in which the trading partners’ interaction is regulated by specific rules for competitive bidding and trade execution. The auctioneer is an intermediary between buyers and sellers and aids the transactions phases of providing information about products and services, which is one of the main values of an auctioneer. He further assists in preparing the transaction by informing both parties about the status of the bidding process and finally cares about the agreement between sellers and buyers. Some online auctioneers tried to carry out the delivery and the payment process for their participants, because of making the transaction process more trustful, but they were not successful with this idea, as the example of shows in Germany. The reason is, that it is a logistic problem for the company to deliver big items something like cars etc. which are also sold at online auctions. The distribution of the items incurred high costs and hence was not profitable for the company. The main transaction aspect, which differentiates online auctions from selling sites is, that there is no “After Sales”. Online auctioneers are not responsible for bad or damaged products or products not corresponding to the description. As mentioned before online auctioneers are also usually not involved in the paying process and therefore are not responsible for default of payment.

Online auctions are used for diverse and heterogeneous objects such as:

- commodities like software, telecommunikation products, flowers…
- perishable items like airline tickets (done by Lufthansa) or
- scarce items without an existing market price

The offered product category depends on the form of the online auction. It is possible to differentiate two forms of online auctions: Buyer-oriented auctions and Seller-oriented auctions. In buyer-oriented auctions the buyer posts his desired items on the auction web site, usually starting with a higher price than necessary and the suppliers try to underbid their competitors. Such an auction is known as a “Dutch auction”, where a descending price mechanism can be noticed. The opposite to this way of bidding is known as “English auction” or “classic auction”. It is mostly seen in seller-oriented auctions, where supplier are posting their items and waiting for the buyers’ quotations. In later chapters it is shown an interest in to the different types of auctions.

The bidding process

Most auctions open with a starting bid, which is the lowest price the seller is willing to accept. Detailed information on every item is available which is posted by the seller. This is one of the most valuable network function an online auctioneer provides for his users. Through the internet the posting of the seller is available nationwide and even worldwide. Bidders look at the descriptions and then start the bidding process by announcing their maximum payment willingness. The biddings, which may last for a few days, are shown on the page of the auctioneer and updated continually to show the current highest bids. To maintain the privacy only the e-mail address is published. At the end, when the bidding process is finished successfully, the purchaser and the seller are getting in contact to execute the delivery and the payment. Most of the online auctioneers are not involved in this process. They are just getting a commission for preparing the transaction and for posting the item onto their network. To offer their users a special service, the transaction partners have to evaluate themselves after fulfilling their part of the transaction. The auctioneer is counting positive and negative evaluations and publishing them for every auction participant, so the users can see, how trustworthy the seller is. The more positive evalutation a participant has the more experienced and the more better it is for him dealing at auctions.

Types of auctions

Online auctions can be differentiated in various categories, for example whether the auction is private (only accessible for certain people) or private. In private auctions there is a difference, whether a sequence rules or not. Japanese auctions are without any sequence whereas in English auctions or Dutch auctions sequences are ruling. This means, that you can do more than just one bid. The difference between the last two methods of realizing an auction is, that the direction of the clock is ascending in English auctions and descending in Dutch auctions (Klein, 2000). In English auctions you start with the minimum price you want to accept. The bidders are seeing the competitive bids and the one with the highest price gets the item. In opposite to that in Dutch auctions you start with an excessive bid and the bidders undercut their prices. This form of an auction is usual in a buyer-oriented auction, where the buyer announces his desired quantity of a product and the suppliers are underbidding themselves.

Other forms of auctions can be distinguished by the quantity of the products, which are sold or bought per transaction or the number of bids and offers given (single/multiple bids and single/multiple offers, periodic or continous occurrence of transactions).


The motives of the participants are clearly different from the various players’ perspectives.

Online auctions contain beside the traditional revenues and costs further side effects and risks. The following two chapters are giving a summary of suppliers’ and customers’ costs and benefits, then these are compared to alternative sales channels.

Supplier Utility

Supplier utility of an auction is a trade off between revenues from sold trade objects and intended side effects on the one hand and auction costs and risks on the other (Bliemel, 2000).

The revenues through sold objects have to be compared to alternative sales channels. For companies it is mostly advisable to sell objects which are not sold through the conventional distribution channels in an auction to make at least any profit. The intended side effects can be realized by becoming publicly known, because there is mostly a lot of traffic on auction sides, refering auction participants to the own web site, getting information about customer preferences, building up customer relations or even doing market research can be an intented side effect. Some online auctioneers offer visiting counter for the sellers, so they can see, how many people are interested in special products.

As mentioned before there are also costs for suppliers. One of them is the fee which has to be paid to the auctioneer, if a buyer was found. A second fee is for setting-up the auction or posting the item. These costs have to be compared with alternative channels, to see how profitable such a way of merchandising is. Another factor, which also can be seen as costs is, that there is always an auction risk for the supplier, when the object is not sold; nevertheless he has to pay a fee to the auctioneer. The risk is low as unsold objects can be returned into a pool of available objects after the auction.

Customer Utility

Customer utility is a trade off between the price of the trade object and the costs for obtaining the respective object. Of course there are side effects and auction risks for the customers, too (Bliemel, 2000).

The paid price at the auction has to be seen in relation to the price in other distribution channels. It is a benefit for the customer, if the price is lower than getting the same object through conventional ways with higher prices. A side effect, caused by auctions, is the fun of the bidding process, so the customers return to auction sides to bid for different items.

Indeed, there are costs for customers, too. The search costs are the invested time (opportunity costs) to find the right sites that sell desired objects at less than the list price. Search costs turn into sunk costs, if the wanted object is not available. The entry fees, if there are any entry fees and the winner curse, if items are bought at a higher price than necessary price, represent negotiation costs. In the future, new technologies can be used to reduce these costs and make auctions even more attractive. Intelligent agents might lower the search costs (Turban, 2000) and bidding agents might lower the negotiation costs (Klein, 2000).

Similar to the risks of the suppliers there exist risks for customers. The wanted object could be sold to another bidder or the final price might be too high.

The Case of Ebay

The Ebay company, with the headquarter in San Jose, California, was founded in September 1995. Ebay is the leading online marketplace for the sale of goods and services. Today, the Ebay community includes 29.7 million registered users (Ebay 2001), and is the most popular shopping site on the Internet (Media Metrix, Measurement Oct. 2001). On any given day, there are about 5 million items listed on Ebay across 4.300 categories, such as automobiles, jewelry, boats, tickets, books, computers etc. and about 600.000 items are new listed per day (Ebay, 2001). The difference between Ebay and other auctioneers is that Ebay didn’t specialize on just special product groups, as Christie’s or Sotheby’s did, and a very successful strategy. To become such a successful company Ebay has had isolated campaigns through radio and print media and also some banner ads on other sites. But compared to other e-commerce sites, Ebay has done very little external promotion to build memberships (E-commerce Times, 2001). They have been able to build their memberships through the word-of-mouth advertising of their users and they also have attracted new members due to amount of media attention that has come to the site in the last years. This phenomenon shows the importance of customer relationship management, especially for pure internet sites to survive in a competitive market. To be profitable as early as possible Ebay used two main mechanisms for charging fees - a listing fee, which is paid regardless of whether or not the item is sold, and a sale fee, which varies depending on the final price for the item. The auction model appears to be such a compelling proposition that it is interesting to notice that only Ebay has made significant profits online. There are four main reasons for Ebay's dominance:

- First mover advantage: Because Ebay was the first to recognize the opportunity of an online auction, Ebay made it very tough for its competitors
- Brand: Ebay successfully build up a brand in a short period of time
- Reliability: Ebay’s fair play policies have engendered confidence in users
- Vertical Markets: Ebay has gone deep in markets, where it sees long term opportunities

For these and other reasons Ebay has done extremely well in building consumer demand and keeping it.

Knowing that trust, safety and privacy plays an important role for keeping customer satisfaction and demand, Ebay is anxious to guarantee their users the maximum dimension of trust and safety. Ebay has contracts with trusted-third-parties and offers various numbers of services to his customers, like feedback forums, evaluation or the controlling of participants.

Further Ebay has country and customer specific sites in Australia, Canada, France, Germany, Italy, Japan, Switzerland, Korea, Ireland and in the UK and in total 52 regional sites, in order to have a global business strategy with the same corporate identity. In every country Ebay has local sites to allow users to easily find items located near to them.

Ebay managed to survive on a critical market, where a lot of internet companies broke down after the big crash at the New Economy Market in March 2000. A good management, an excellent strategy guaranteed Ebay a leading position all the time, although there were a lot of similar companies, who tried to penetrate into the same market.


Finally it is possible to say that Web auctions and electronic markets in general have recently emerged at a high rate. Technological progress and the profileration of global communication infrastructure have enabled numerous players to expand the use of the advantages of auction mechanisms in an computer-mediated environment.

Auctions have gained a prominent place among and next to other forms of distribution or procurement channels. They are applied for specific customer or product segments, for direct sales as marketing events.

The Web has provided low-cost access to a global market space and at the same time highly focused customer groups. Cost-efficient communication infrastructures and low-cost market-engines have enabled auctioneers to set up auctions quickly and with limited investments. The World Wide Web has reduced suppliers’ and buyers’ auction-related costs and increased their revenues. For suppliers it has become less expensive to set-up auctions and to communicate the availability of specific trade objects. For buyers, the cost to search for specific objects and to participate in an auction has been reduced and will be further reduced in the future. Consequently, new types of auctions are emerging and the trade object range has been extended into new domains.


Bliemel, F., Fassott, G., & Theobald, A. (2000). Electronic Commerce, 3. Edition, Munich, Gabler

Ebay Company information (2001). Retrieved December 5, 2001 from the World Wide:

Ecommerce Times (2001). Retrieved December 9, 2001 from the World Wide:

Jupiter Research (2001). Retrieved December 5, 2001 from the World Wide:

Klein, S.: The Emergence of Auctions in the World Wide Web in: Shaw, M., Blanning, R., Strader, T., & Whinston, A.(Edts.) (2000). Handbook on Electronic Commerce . New York, Springer

Media Metrix (2001). Retrieved December 9, 2001 from the World Wide:

Turban, E., Lee, J., King, D., & Chung, H.M. (2000). Electronic Commerce: a managerial perspective. New Jersey: Prentice-Hall.

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Online auctions
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Ali Yildirim (Author), 2001, Online auctions, Munich, GRIN Verlag,


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