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