A critical review of online auction models

Journal of the Academy of Business and Economics, Jan, 2004 by Subir Bandyopadhyay, Julie Wolfe

ABSTRACT

Online auction has become an integral part of Internet shopping. It is one of the few models of e-commerce that has proven to be successful. However, many auction sites have failed because they were not able to create a unique business mode/that appealed to buyers and sellers. This paper explores the myriad of business models associated with online auctions, and classifies them as consumer-to-consumer (C2C), business-to-consumer (B2C), business-to-business (B2B), business-to-government (B2G), and government-to public (G2P). In addition, it identifies some of the key variables (such as user interactivity, product offerings, level of trust, rapid growth and adoption, networking, level of commitment, and payment options) that determine the success or failure of online auction models.

1. INTRODUCTION

The Internet has transformed business and business models. Some models have caught the imagination of consumers; others simply faded into oblivion. Online auction is one of those business models that have proven to be successful. In fact online auction was expected to account for 29% of all e-commerce in 2002 (Kaiser, 2003). The big auction powerhouse, eBay, had $2.17 billion in revenue for 2003 with net income of $441.8 million (www.ebay.com) and is one of the few Internet companies to post positive earnings. Hence, it is important to consider online auctions as a part of the Internet's phenomenal economic growth.

However, this remarkable growth of online auctions overshadows a tale of many failures. In the last three years, many online auction sites have shut down or merged with other auction sites. Sites that have recently shut down include SandCrawler.com, FirstAuction.com, and Auctions.com. It is, therefore, clear that the online auction business is going through the "shake-out phase". Consequently, we believe that it is critical for businesses to understand what it takes to be successful in the online auction arena. Only those companies that create a unique model and know what buyers and sellers are looking for in an online auction will be able to survive this critical phase.

In this paper, we first classify different types of auction models into five major categories: consumer-to-consumer (C2C), business-to-consumer (B2C), business-to-business (B2B), business-to-government (B2G), and government-to-public (G2P). Next we identify and discuss some of the key variables (i.e., user interactivity, product offerings, level of trust, rate of growth and adoption, networking, level of commitment, and payment options) that determine the success or failure of online auction models. Finally, we evaluate a popular online auction model with respect to these key variables.

2. CLASSIFYING ONLINE AUCTION MODELS

When considering online auctions, it is important to consider who is involved in the auction process as the buyer and as the seller. There are three main groups of buyers and sellers: individual consumers (C), businesses (B), and the government (G). We term buyers of government auctions as the general public (P), as the government does not distinguish between consumers and businesses when they are selling surplus goods. This would result in six business models, but because of economies of scale it is not likely that a consumer will sell to a business. Hence, we believe that online auctions can be classified into five main models based on who the buyer and seller are: C2C, B2C, B2B, B2G, and G2P.

3. RECENT AUCTION TRENDS

Many businesses, including the Disney Store and Hooked on Phonics, have realized that online auction is rapidly becoming a large sales channel. In addition, auctions can be a very cost effective way to "recycle" returned goods (Gentry, 2003). Recently Sears started selling returned merchandise on eBay and reported that it actually made more money listing the item on the auction site than it did by discounting the item in a local store (www.shareholder.com/ebay).

In the infancy stages of online auction sites, most sites were purely C2C or B2C. However, recent trends have indicated there is a dramatic rise in the B2B online auctions. According to an eBay press release it is estimated that "business buyers represent more than $1 billion in annualized gross sales. Hence, the online auction sites need to capitalize on this new model.

4. KEY VARIABLES FOR THE SUCCESS OF ONLINE AUCTIONS

There are many important variables that determine the ultimate success or failure of an online auction site. These include user interactivity, product offering, level of trust, rate of growth and adoption, networking, level of commitment, and payment options. We used a multi-pronged approach to determine the set of key variables. First, we asked 50 participants in a famous auction site to rate 10 key variables. Second, we reviewed the auction literature thoroughly to identify the key variables. Finally, we leveraged on our vast personal knowledge gained through participation in online auctions. Based on this elaborate process, we identified the six key variables mentioned earlier. Below we describe the six variables in details. Please see the table for a complete list of these variables and comparative evaluation of major auction sites