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