| The online auction business model is one | | | | bidders). The items do not need to be |
| in which participants bid for products | | | | shipped to a central location, reducing |
| and services over the Internet. The | | | | costs, and reducing the seller's minimum |
| functionality of buying and selling in | | | | acceptable price. |
| an auction format is made possible | | | | 3. Intensity of social interactions. The |
| through auction software which regulates | | | | social interactions involved in the |
| the various processes involved. | | | | bidding process are very similar to |
| eBay, the world's largest online auction | | | | gambling. The bidders wait in |
| site, is one of the better known | | | | anticipation hoping they will "win" |
| examples. Like most auction companies, | | | | (eBay calls the successful bidder the |
| eBay does not actually sell goods that | | | | "winner"). Much like gambling addiction, |
| it owns itself. It merely facilitates | | | | some bidders may bid primarily to "play |
| the process of listing and displaying | | | | the game" rather than to obtain products |
| goods, bidding on items, and paying for | | | | or services. This creates a highly loyal |
| them. It acts as a marketplace for | | | | customer segment for eBay. |
| individuals and businesses who use the | | | | 4. Large number of bidders. Because of |
| site to auction off goods and services. | | | | the potential for a relatively low |
| Several types of online auctions are | | | | price, the broad scope of products and |
| possible. In an English auction the | | | | services available, the ease of access, |
| initial price starts low and is bid up | | | | and the social benefits of the auction |
| by successive bidders. In a Dutch | | | | process, there are a large numbers of |
| auction, multiple identical items are | | | | bidders. |
| offered in one auction, with all winning | | | | 5. Large number of sellers. Because of |
| bidders paying the same price -- the | | | | the large number of bidders, the |
| highest price at which all items will be | | | | potential for a relatively high price, |
| sold (treasury bills, for example, are | | | | reduced selling costs, and ease of |
| auctioned this way). Almost all online | | | | access, there are a large number of |
| auctions use the English auction method. | | | | sellers. |
| Strengths of the business model | | | | 6. Network economies. The large number |
| The strategic advantages of this | | | | of bidders will encourage more sellers, |
| business model include: | | | | which, in turn, will encourage more |
| 1. No time constraints. Bids can be | | | | bidders, which will encourage more |
| placed at any time (24/7). Items are | | | | sellers, etc., in a virtuous circle. The |
| listed for a number of days (usually | | | | more the circle operates, the larger the |
| between 1 and 10, at the discretion of | | | | system becomes, and the more valuable |
| the seller), giving purchasers time to | | | | the business model becomes for all |
| search, decide, and bid. This | | | | participants. |
| convenience increases the number of | | | | 7. Captures consumers' surplus. Auctions |
| bidders. | | | | are a form of first degree price |
| 2. No geographical constraints. Sellers | | | | discrimination. As such, they attempt to |
| and bidders can participate from | | | | convert part of the consumers' surplus |
| anywhere that has internet access. This | | | | (defined as the area above the market |
| makes them more accessible and reduces | | | | price line but below the firm's demand |
| the cost of "attending" an auction. This | | | | curve) into producers' surplus. On-line |
| increases the number of listed items | | | | auctions are efficient enough forms of |
| (ie.: number of sellers) and the number | | | | price discrimination that they are able |
| of bids for each item (ie.: number of | | | | to do this |