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