Impact of Internet Auctions on E-commerce

Introduction

Electronic commerce is the ‘marketplace’ on the World Wide Web. Like the traditional marketplace, it is a venue for exchange of goods and services between parties referred to as buyers and sellers. Business transactions like buying, selling, distributing, marketing and providing services done over the internet and other computer networks are classified into the e-commerce.

One of the functions of E-commerce is Internet Auction. It is exactly the same in context to the traditional auction sale except it is done over the internet. In Internet Auction, a sale is broadcasted over a broader audience depending upon the terms of the Internet Auction provider, usually referred to as the ‘marketplace’. There are thousands of auctions sites found on the internet today. Among the biggest names are eBay.com and Amazon.com. Internet Auction is drawing much attention from the business sectors. It provided ease and comfort both to the buyers and sellers. It provides benefits that befit the current needs of our population which in turn, provides opportunity for business expansion and growth.

Internet Auction has become very successful these days. This success is attributed to the hastened growth and development in the field of information technology. The hastened growth and development in information technology has brought Internet Auction to a higher degree of leverage in the electronic marketplace. However, there are certain security issues that are parallel to this growth. It posed a threat to the stability of the whole e-commerce system.

The future of internet auction hangs in the course of the development and progress in the field of information technology. To this, the whole e-commerce system is also very dependent.

This essay is aimed at exploring the different sections of Internet Auction and describing and analyzing its impact on e-commerce.

Internet Auction: How it Works

Internet Auctions, also called online auctions, are sales transactions conducted over the internet. It allows consumers and merchants to buy stuff or sell merchandise through a competitive bidding process using the information superhighway, the route where there is “much less congestion than the Capital Beltway” (Shea, 2004). Internet auction have enjoyed rapid success in the electronic commerce as it experiences a rapid increase in popularity among the parties and business sectors. According to Jupiter Research, the total value of goods and services traded in the US E-commerce from online auctions controlled by consumers alone has doubled from $3 billion in 1999 to a whopping $6.4 billion in 2000. Today, there are thousands of hosted sites found on the internet that provide consumer online auction. eBay.com is the by far the largest of all the existing hosted auction sites.   

How it Works

In order to start an online auction, the individuals or business organizations involved in any business must first chose a type or platform of the auction site. There are two options to which they can choose from: join an existing online marketplace via a hosted site or create a dedicated company that will cater the over-all operation and maintenance of the financial institution.

Via a hosted site. This is the simplest way to start an online auction. This uses an existing hosted auction site, such as eBay. The seller, or creator of the auction, is required to register to secure the items which he or she wants to sell through the bidding process. The seller usually sets the terms and conditions of the process separate from the terms provided by the hosted auction site. This includes “reserve price” (the lowest price the seller accepts for the item he or she wanted to be auctioned), duration or time limit of the auction, delivery of the merchandise and payment system. Once an interested bidder, and hopefully the winning bidder, gets the final bid, provided that the terms and conditions are met, the transaction is over.

This method of online auction is the ideal choice for small and medium businesses who would like to engage in online auctions but do not regularly do so. Unlike the second option, conducting online auctions via a hosted site gives the company faster implementation and lower capital is required. Also, there is little or no need for an information technology staff since all the system processes are carried off by the hosted site. This option gives ease not just to the seller who wish to sell their items but also to the consumers. Anyone can access the auction site and view the items being auctioned. What the buyer needs is a web browser and a few information about the product, such as a digital image of it.

Via a company created for the purpose. This is usually done by larger companies who want to set auctions on a regular basis and usually on a large-scale marketing system. In this option, the company will create a dedicated company to take charge of the in-house auction site. This requires facilities and manpower just like the usual company and a much, much bigger financial support is needed in order to start and maintain it. It should have adequate information technology staff that will design and operate the site. Companies may want to develop their own auction software but there is a wide variety of software packages readily available for market use. IBM, Open Site Technologies, Netmerchants, and Microsoft, are some of the leading competitors in the global auction software market. An auction software package may include options such as e-mail notification systems, chat, or search engines, which are some of the basic functions useful for businesses that plan to sell their items through online consumer auctions. These options help improve seller-buyer interactions and better deals are set.

This option has some advantages as well as disadvantages. For the businesses, setting and maintaining an in-house auction site can cost more than $100,000 annually. This is an unusually large investment but if there is a loyal market coupled with good management, the company is bound to success. Auction sites maintain their popularity to further their operation and increase their revenues. eBay.com constantly review the items that sellers provide and warns their customers, the prospected buyers, of item fraud. In this way, there is a degree of trust given to the company and that it maintains its popularity over the electronic marketplace. 

Types of Auctions

Before setting up an auction, it is important to note the different ways in which the buyer can participate in the auction. There are various types or methods of auctions the seller can chose from. Some of the popular types are open cry auction, sealed bid auction, and Dutch auction. The open cry auction is the most common type of auction and is widely used in online auctions. In this type of auction, the seller sets the initial price, or “reserve price”, of the item. Anyone interested will bid on a price equal or higher than the initial price and the highest bidder is considered the winning bidder of the auction. All participants are informed about the current status of the auction, i.e. the highest price to beat, and everyone has an equal right to bid.

The sealed bid auction is the type wherein the potential buyers do not receive information about the status of the auction—the bidders and their bid. This is done by sellers in order for the potential buyers to prepare their bids quickly or they just do not want the bidders to know about other bidders and the amount of bids.

The Dutch auction is largely controlled by the seller. The difference is that the seller offers the item at a high price at the initial phase of the auction. It is then gradually reduced until a bidder accepts the offer at the stated price. This works for expensive items having high demands on the market. However, the process is slow and requires an extended time period.

Auctions can also be classified into forward or reverse auction. In forward auction, the seller offers the item to multiple buyers. The winning bidder will have the item and pays it at the indicated price. While the forward auction is seller-centered, the reverse auction is buyer-centered. Reverse auctions are auctions in which the buyer sends requests to companies or sellers for a certain product or service. The seller or provider will then bid for the price to offer to the buyer. The buyer is in control of the auction and the over-all bidding process and will have the right to decide which seller will win the auction. In the future, this type of auction is expected to be the key player in the e-commerce, particularly large-scale transactions such as online purchase of heavy industrial machineries or automobile engines. 

Regulating the Online Auction

Once the seller or buyer established a connection to the online marketplace, he or she can start an online transaction such as the internet auction. However, there are certain rules to which the sellers and buyers are obliged to follow. Certain auction regulations allow successful business deals and security in information exchange. In a hosted auction site, for example, the common practice is that in order to bid for the item, he or she must be registered and logged into his or her account. For the seller, he or she must provide all the necessary information or basic parameters of the items for sale, including digital images and descriptions. The most commonly used method of auction in the online market is the open cry auction. The seller usually sets the duration of the auction and the lucky bidder, meaning the participant with the highest bid, gets the item(s) and pays for it at the price he or she bid. One disadvantage of the hosted auction sites is that there is a degree of intervention between the site and the parties. Some people find it uneasy when sharing personal credit information. In an in-house auction site, the regulation starts from the auction software the buyer or seller uses. In most cases, the parties usually have more control over the transactions they do in the online auction company.

Internet Auction: Importance, Benefits, and Disadvantages

The growth in information technology has brought tremendous changes in the business sector of the economy, particularly the development of e-commerce. Internet auction has enjoyed a rapid increase in popularity since the year 2000 as the result of many developments in the field of information security management. There were a lot of issues and concerns on the information security such as internet auction fraud and identity theft.

Importance of the Technology

Internet auction plays a vital role in the development of domestic economies by creating a virtual marketplace for different types of businesses. It allows everyone who has access to the internet the ability to sell products to a broader audience. This means bigger net sales for the particular business as well as other businesses linked to it, such as credit card companies and logistics. Online auction provides opportunity for businesses to expand through the virtual marketplace.

This technology is also important to the consumers. Buying items online is almost the same as buying on a marketplace but the cost is greatly decreased. It requires less time and effort compared to actual mall shopping. It provides comfort for the consumer from purchase to delivery.

Internet auction plays a vital role in globalization since most countries today are reachable through the internet. Purchasing items from different parts of the world is faster and easier. Internet auction allows businesses to choose from a variety of offers and requests from the consumers. The consumers, on the other hand, will have a wide selection of products and services.

Benefits of Online Auction

Before we discuss the different disadvantages and issues related to internet auction, let us first learn about the benefits or advantages of using the information superhighway in making online auctions. The following are some of the benefits/advantages/strengths of internet auction:

1. Anyone can bid anytime. This benefit provides convenience to the bidders, especially those who do not have regular access to the internet.
2. Anyone can bid anywhere. This benefit provides convenience to the bidders because they no longer have to go to places/auction sales to bid for the same item(s). Anyone can have access to the online auction from anywhere that has internet access. For the seller, he or she will have auctioned the item(s) at a much lower “reserve price” since the cost of making an auction was greatly reduced.
3. Everyone can participate in the auction. Social interactions in online auctions are more intense since the auction is broadcasted over broad and varied audiences. Some people who join the bidding bid primarily just to “play the game” and not serving the actual purpose of purchasing the item. These people find it very exciting. eBay, for example, calls the successful bidder the “winner”. Many of its registered users join the bidding just to be called the “winner”. This creates a “highly loyal customer segment” for the consumer-based auction company.
4. More sellers, more bidders; more bidders, more sellers. Internet auction provides a good platform for business growth. Since an auction held on the internet is broadcasted over a broad audience, more sellers are given more opportunities to sell their item(s), product(s) or service(s). In turn, more bidders are encouraged to join the electronic marketplace. Some companies nowadays rely on e-commerce and the power of information technology in selling their product. Dropshifting, a business process, can be successfully done in the internet in many ways. One is to use the internet auction platform.

Disadvantages of Internet Auction

In any case, parallel to the advantages are the disadvantages. The disadvantages of internet auction are largely behavioral, or in other words, caused by lack of discipline by some individuals or organizations. The risk of failure is very, very low when we consider the technical problems as the cause of uncompleted or failed transaction. Complains reported to the Federal Trade Commission include failure in sending the merchandise, sending something of lesser value than the original item advertised, failure to deliver the product on time, failure to give information about the product despite the rules set by the auction site and other reports of internet auction fraud. All these problems hinder progress in the e-commerce sector of business and economy.

Breach of information. The problem with using the internet in doing business transactions is the security of the information, especially credit card information, provided by the participants. Breach of information is what happens when an unauthorized party/parties, intentionally or unintentionally, capture/s a highly confidential information. The following are forms of breach of information: interception of messages; theft of stored data; information sabotage; spoofing; and, denial of service.

Internet auction fraud. Perhaps the most popular issue circulating in the cyber world today is the issue on information security, particularly internet auction fraud. According to the Nilson Report released on June 2003, the global credit card fraud losses reached $3.8 billion on 2002. Table 1 summarizes the Nilson Report.

Table 1. Global bank card fraud (losses per US$ 100 Volume).

Source: The Nilson Report, June 2003

 Identity theft, coupled with credit card fraud, is the main constraint in the success of internet auction and the e-commerce as a whole. Certain anti-hacking laws need to be revised to meet the current problems with regards to internet auction fraud.

Internet Auction and the Future of E-commerce

The increasing popularity of online auction resulted to exponential growth in e-commerce industry. There is really a direct correlation between the growth of e-commerce and online auction business model. I believe that online auction will be the primary form of trade in the future based from its current performance. Although there are certain issues, especially the issues on privacy and security in online transactions, each business that engage in online auction are trying their best to eliminate this problem. The result will be trust and loyalty from the customers to that particular business which in turn, ensure prolific growth in sales. Thus, the future of e-commerce will also be ensured.

Conclusion

Internet auction enjoyed a rapid increase in popularity over the last decade. It has been expected that internet auction will have reached the height of success beyond what it is at the present. Internet auction plays a vital role in the globalization as it serves as a venue for growth of various types of businesses, including food and other services.

The e-commerce, dubbed as the marketplace in the information superhighway, will never be this successful without the rapid developments in the information technology sector. Internet auction, and all of its contents, relies on these developments just as e-commerce relied on online transactions such as online auctions. There are several issues and concerns about the use of the internet which are reflected in the billions of losses in fraudulent business transactions. However, further developments in information technology and legislations will result into safer transactions. In the end, the future of e-commerce will be largely based on the success of online auction as the method of trade.

References:

S Arrison, The Future of E-commerce, 2002, Retrieved 4 May 2007, <http://www.pacificresearch.org/press/opd/2002/opd_02-08-29sa.html>

 Australian Competition and Consumer Commission, Internet Auctions, retrieved 1 May  2007, <http://www.accc.gov.au/content/index.phtml/itemId/85563/fromItemId/274365>

Federal Trade Commision, Internet Auctions: A Guide for Buyers and Sellers, retrieved 1 May 2007, <http://www.ftc.gov/bcp/conline/pubs/online/auctions.shtm>

T Knox, Dropship Your Way to Ebay Success, 2005, Retrieved 1 May 2007, <http://www.webpronews.com/topnews/2005/08/30/dropship-your-way-to-ebay-success>

K Scharabok, Beware of Internet Auction Scams, Countryside & Small Stock Journal, Nov. 2004.

EJ Shea, Untangling the Web: Foodservice Operators Find Manufacturers’ Pages and Internet Auction Sites Are Handy Places to Shop, Restaurants & Institutions, Oct. 2004.