Auction Sites

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AUCTION SITES

Online auctions have proven very popular with consumers and businesses alike. They offer many benefits to both buyers and sellers. Online auctions offer buyers the promise of lower prices for merchandise and collectibles. Yet, spirited bidding for desirable items may drive up prices beyond what they would have been in a fixed price environment. Online auctions have virtually unlimited geographic reach, bringing together buyers and sellers from almost anywhere in the world. While not yet fully realized, online auctions have the potential to revolutionize pricing by replacing sticker (or fixed) prices, with a dynamic pricing model whereby merchandise is priced according to what the market will bear.

Initially, collectibles were the dominant type of merchandise sold at online auctions. While collectibles remained a popular category, merchandise such as office supplies, computers, and heavy machinery became more prevalent during 2000. High-ticket items for consumers have not been as successful at auction as once hoped. In April 1999 eBay, the leading auction site, acquired Butterfield & Butterfield, a 134-year-old U.S. auction house that specialized in fine art auctions. As a result eBay launched eBay Great Collections in October 1999, offering authenticated art items priced between $250 and $10,000. At its launch, eBay Great Collections had signed up 80 art dealers to provide items for auction. In March 2001 a high-priced auction on eBay of early photographs of Marilyn Monroe failed to result in a sale when bids fell short of the seller's reserve price. However, the same sale saw items in the $15,000 to $20,000 range sell through bids that were placed over eBay's art and collectibles site, eBay Premier.

In mid-1999 Amazon.com formed an alliance with auction house Sotheby's Holdings Inc. to launch a joint auction site specializing in art, antiques, and collectibles. All of the items were offered by Sotheby's and other affiliated art dealers at Amazon.com 's auction site, and the authenticity and condition of each item was guaranteed. The site launched in November 1999, but it closed after less than a year in October 2000. Sothebys.com continued to offer fine art auctions, as did other major art auction houses.

Online auction sites also can offer unusual items that would be difficult, if not impossible, to find elsewhere. Their wide geographic reach is especially useful to collectors, who would have difficulty hooking up with sellers in different parts of the world without the Internet. Sometimes, controversial items are offered for sale. In September 1999 a human kidney was offered for auction on eBay. Bidding reached more than $5.7 million before eBay blocked the sale as illegal.

AUCTIONS BUILD TRAFFIC

Because of their popularity with consumers, online auctions are seen as a way for Web sites to increase traffic. Online auctions have a certain "game" quality for consumers, who often approach them as a winning or losing proposition. Online auctions typically stretch out over several days or even weeks and end at a specific time. Consumers may employ automated bidding software to find desired items and place bids at appropriate times. They often develop a bidding strategy to increase their chances of getting the items they want at a reasonable price. One strategy known as "sniping" involves placing a winning bid at the last possible second, just before the auction expires.

Forrester Research estimated that online auction sales reached $1.4 billion in 1998 and projected they would increase to $19 billion by 2003. Consumer-to-consumer online auctions accounted for $3 billion in sales in 1999, according to E-Commerce Times. eBay is the leading auction site on the Internet and as of November 2000 it was the tenth-most-visited Internet site. At that time some $12 million worth of daily merchandise was sold at auction on eBay. Yahoo! Auctions sold about $500,000 a day, and Amazon.com 's auctions sold about $200,000 per day.

The 2000 holiday shopping season saw a surge of visitors to online auction sites. According to Media Metrix, eBay had 2.6 million average daily unique visitors, compared to 1.6 million for Amazon.com, for the week ending December 3, 2000. That represented an 89-percent increase over the same week in 1999 for eBay. Daily visits to online auction sites in general were up 62 percent over the previous year during the holiday season.

BUSINESS-TO-CONSUMER AUCTIONS

Businesses also sell goods and services through auction sites. Small businesses use auction sites such as eBay, Yahoo! Auctions, and Auction World not only to sell merchandise, but also to build their brand and reputation. Online auctions also give businesses an outlet for selling excess inventory that would have remained in their warehouse. Other uses that businesses find for auction sites include test marketing new products to see if they will sell. Occasionally, bidders will drive up the price of item to a level well above what was expected.

Most auction sites post feedback on how well sellers perform. While positive feedback can enhance a seller's reputation, a few negative comments from a small number of buyers have the potential to tarnish a seller's name. In order to ensure positive feedback, sellers must devote more resources to providing high levels of customer service. Auction shoppers tend to be value-oriented and have high expectations for service.

Businesses that use auction sites to list their merchandise must also be prepared to devote time to posting their listings, answering a large volume of e-mail, and managing functions such as billing, shipping, and payment collection. Some of the larger auction sites provide tools to help with some of these chores, and there are even businesses that specialize in providing auction management services to small businesses in the form of Web-based tools. AuctionWatch.com promotes itself as "The Complete Auction Management Solution" and offers a range of services for buyers and sellers.

Selling items to the highest bidder without running a credit check on them leaves sellers open to the risk of non-payment. As a result some of the top auction sites offer an escrow service, where a third party holds the buyer's payment until the product is shipped and received. Escrow services were designed primarily to protect buyers from receiving shoddy or inaccurately described merchandise, but they also offer a measure of protection to sellers as well. At Amazon.com 's auctions, bidders pay using their credit card, and Amazon.com handles the financial aspects of the auction transaction.

Businesses that want to sell at auction have several options. First, they can list their items at the major auction sites. They also can utilize more specialized auction sites that are devoted to business-oriented items. For a bigger fee, businesses can use the services of an auction portal, such as FairMarket Auction Place, which places auction items by category on several other Web sites.

AUCTION FRAUD

A report released by the Federal Bureau of Investigation (FBI) in March 2001 ranked online auction fraud as the number one scam on the Internet. Internet auction fraud was the cause of 64 percent of complaints filed with the U.S. government's Internet Fraud Complaint Center (IFCC). By comparison, credit and debit card fraud accounted for only five percent of the complaints. Among the practices included by the IFCC as Internet auction fraud were non-delivery of items, misrepresentation of items' value, stealing of goods from an online merchant through the involvement of a third party (triangulation), adding extra charges once bidding was completed (fee stacking), the sale of black-market goods, multiple bidding by the same buyer under different accounts or aliases, and false bidding by the seller (shill bidding).

In October 2000 the U.S. Federal Trade Commission (FTC) also reported that online auction fraud topped its list of "Top Ten Dot Cons," based on complaints it received through its Consumer Sentinel database. The FTC said that the number of reported cases of online auction fraud rose from 100 in 1997 to 10,000 in 1999. The FTC's guide to Internet auctions provides information about protecting against online auction fraud.