Online auction business model
The online auction business model is one in which participants bid for products and services over the internet. In an English auction the initial price starts low and is bid up by successive bidders. In a Dutch auction the price starts high and is reduced until someone buys the item. E-Bay, the dominant competitor in this business space, employs both types of auctions, in addition to straight e-tail selling.
The strategic advantages of this business model are:
1) No time constraints. Bids can be placed at any time, 24 / 7 . Items are listed for between 5 to 10 days (at the discretion of the seller), giving purchasers time to search, decide, and bid. This convenience increases the number of bidders.
2) 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.
3) 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” (e-Bay 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 e-Bay.
4) 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.
5) 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.
6) 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 virtuous spiral. The more the spiral operates, the larger the system becomes, and the more valuable the business model becomes for all participants.
7) 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.
Strengths of the business model
Companies that use the model
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