E-Business Eighth Edition

1. E-BusinessEighth Edition Chapter 6Online Auctions, Virtual Communities, and Web Portals

2. Learning Objectives In this chapter, you will learn about: Origins and key characteristics of the seven major auction types Strategies for Web auction sites and auction-related businesses Virtual communities and Web portals E-Business, Eighth Edition 2

3. Auction Overview • Business use of the Web • Improve existing processes • New items • Running auctions • Creating virtual communities • Operating Web portals • Online auctions provide business opportunity • Charge buyers and sellers • Sell targeted advertising • Strength of Internet • Brings people together: common narrow interest E-Business, Eighth Edition

4. Origins of Auctions • From Babylon to the Roman Empire to Buddhists • Common activity of 17th century England • Sotheby’s (1744), Christie’s (1766), colonial auctions • Auction: seller offering item for sale • Bids: price potential buyer willing to pay • Bidders: potential buyers • Private valuations: amounts seller willing to pay • Auctioneer: manages auction process • Shill bidders: bidder who seller or auctioneer employees • May artificially inflate price E-Business, Eighth Edition

5. English Auctions • Bidders publicly announce successively higher bids • Stop at highest bid • Item sold to highest bidder (at bidder’s price) • Also known as: • Ascending-price auction • Open auction (open-outcry auction) • Bids publicly announced • Minimum bid • Beginning price • If not met: item removed (not sold) E-Business, Eighth Edition

6. English Auctions (cont’d.) • Reserve price (reserve) • Seller’s minimum acceptable price • Not announced • If not exceeded: item withdrawn (not sold) • Yankee auction • Multiple item units offered for sale • Bidders specify quantity • Highest bidder allotted bid quantity • Remaining items allocated to next highest bidders • Until all items distributed • Bidders pay lowest successful bidder price E-Business, Eighth Edition

7. English Auctions (cont’d.) • English auction seller drawback • May not obtain maximum possible price • English auction buyer drawback • Winner’s Curse • Psychological phenomenon • Caught up in competitive bidding excitement • Bidders risk bidding more than their private valuations E-Business, Eighth Edition

8. Dutch Auctions • Open auction • Bidding starts at a high price • Drops until bidder accepts price • Also called descending-price auctions • Seller offers number of similar items for sale • Common implementation • Use a clock (price drops with each tick) • If items remain: clock restarted E-Business, Eighth Edition

9. Dutch Auctions (cont’d) • Advantages • Seller obtains close to highest private valuation • Quickly move large numbers of commodity items • Disadvantages • Sales or product interest generated: does not justify cost of operation • Customer confusion • Successful examples • Google initial public offering stock sale (2004) • LookSmart stock repurchase (2008) E-Business, Eighth Edition

10. First-Price Sealed-Bid Auctions • Sealed-bid auctions • Bidders submit bids independently • Prohibited from sharing information • First-price sealed-bid auction • Highest bidder wins • If multiple items auctioned: next highest bidders awarded remaining items • At their bid price E-Business, Eighth Edition

11. Second-Price Sealed-Bid Auctions • Second-price sealed-bid auction • Same as first-price sealed-bid auction • Exception • Highest bidder awarded item at second-highest bidder price • Vickrey auctions • William Vickrey: 1996 Nobel Prize in Economics • Yields higher seller returns • Encourages all bidders to bid private valuation amounts • Reduces tendency for bidder collusion E-Business, Eighth Edition

12. Open-Outcry Double Auctions • Open-outcry double auctions • Sealed bid or open outcry • Good for: items of known quality traded in large quantities • No item inspection before bidding • Example • Chicago Board of Trade: commodity futures and stock options • Buy and sell offers shouted by traders in trading pit • Each commodity, stock option traded in own pit • Quite frenzied E-Business, Eighth Edition

13. Sealed-Bid Double Auctions • Double auction • Buyers, sellers submit combined price-quantity bids • Auctioneer • Matches sellers’ offers • Starting with lowest price and then goes up • To buyers’ offers • Starting with highest price and then goes down until all quantities offered are sold • Operation format • Sealed bid or open-outcry • Example: New York Stock Exchange E-Business, Eighth Edition

14. Reverse (Seller Bid) Auctions • Reverse auction (seller-bid auction) • Multiple sellers submit price bids • Auctioneer represents single buyer • Bids for given amount of specific item to purchase • Prices go down as bidding continues • Until no seller is willing to bid lower • Used by consumers • Largest dollar volume • Businesses: both buyers and sellers • Buyer acts as auctioneer • Screens sellers before participation E-Business, Eighth Edition

15. E-Business, Eighth Edition

16. Online Auctions and Related Businesses • Online auction business is rapidly changing • Three auction Web site categories • General consumer auctions • Specialty consumer auctions • Business-to-business auctions • Consumer auctions • Considered business-to-consumer e-commerce • E-commerce • Considered Consumer-to-business • Bidders might be businesses E-Business, Eighth Edition

17. General Consumer Auctions • eBay • Registration required, seller fees, rating system • Seller’s risk • Stolen credit cards; buyer fails to conclude transaction • Buyer’s risk • No item delivery; misrepresented item • Most common auction format: English auction • Seller may set reserve price • Bidders listed: bids not disclosed (until auction end) • Continually updated high bid amount displayed • Private auction option E-Business, Eighth Edition

18. General Consumer Auctions (cont’d.) • eBay (cont’d.) • Minimum bid increment • Amount by which one bid must exceed previous bid • Proxy bid • Bidder specifies maximum bid • May cause bidding to rise rapidly • eBay stores • Integrated into auction site • Sellers generate additional profits E-Business, Eighth Edition

19. E-Business, Eighth Edition

20. General Consumer Auctions (cont’d.) • eBay’s success • No specific audience • Advertises widely ($800 million yearly: mass media outlets) • Major determinants of Web auction • Attracting enough buyers and sellers • Creating markets in many different items • Yahoo! (closed in 2007) • Amazon.com (“Auctions Guarantee”: closed in 2006) • Offered buyer protection through Escrow service • Overstock.com (still active) E-Business, Eighth Edition

21. General Consumer Auctions (cont’d.) • Lock-in effect • Economic structure of markets • Based against new entrants • Markets become more efficient • As number of buyers and sellers increases • Example: Japanese general consumer auction • Yahoo! dominates (97%) • eBay maintains low market share (3%) E-Business, Eighth Edition

22. Specialty Consumer Auctions • Specialized Web auction sites • Meet special-interest market needs • No need to compete with eBay • Early Web auction sites (first wave) • Featured technology items • Doug Salot: Haggle Online (now uBid) • Other specialized auction sites (second wave) • JustBeads.com, StubHub • Cigarbid.com, Golf Club Exchange, Winebid • Strong market segments; readily identifiable products • Desired by people with high disposable incomes E-Business, Eighth Edition

23. E-Business, Eighth Edition

24. Consumer Reverse Auctions and Group Purchasing Sites • Reverse bid • Visitor describes desired items or services • Site routes visitor to participating merchants • Reply to visitor by e-mail • Offer item at particular price • Buyer accepts • Lowest offer • Offer best matching buyer’s criteria • All these types of sites now closed E-Business, Eighth Edition

25. Consumer Reverse Auctions and Group Purchasing Sites (cont’d.) • Priceline.com • Considered a seller-bid auction site • Visitor states desired airline ticket, car rental, hotel room price • If sufficiently high price: transaction completed • Many transactions come from inventory • Priceline operates more as a liquidation broker E-Business, Eighth Edition

26. E-Business, Eighth Edition

27. Consumer Reverse Auctions and Group Purchasing Sites (cont’d.) • Group purchasing site • Similar to consumer reverse auction • Seller posts item with price • Individual buyers enter bids • Agreement to buy one unit (no price provided) • Site can negotiate with item’s provider for better price • Posted price decreases • As number of bids increases (only if number of bids increases) • Result: buyers force seller to reduce price • Like consumer reverse auction E-Business, Eighth Edition

28. Consumer Reverse Auctions and Group Purchasing Sites (cont’d.) • Well-suited product types • Branded products, well-established reputations • Produces buyer confidence of good bargain • High value-to-size ratio • Non-perishable • Disadvantages • Difficulty attracting sellers’ interest • Well-suited companies • Find no advantage, fear sites cannibalize product sales, reluctant to offend current distributors • Group purchasing sites fell apart E-Business, Eighth Edition

29. Business-to-Business Auctions • Evolved to meet specific existing need • Excess inventory disposal (manufacturing) • Two traditional methods • Large companies • Liquidation specialists find buyers for unusable items • Small companies • Liquidation broker firms find buyers for items E-Business, Eighth Edition

30. Business-to-Business Auctions (cont’d.) • Emerging business-to-business Web auction models • Direct descendants of traditional methods • Large-company model • Business creates its own auction site • Small-company model • Third-party Web auction site instead of liquidation broker • Resembles consumer online auctions E-Business, Eighth Edition

31. Business-to-Business Auctions (cont’d.) • Large-company model example • Ingram Micro’s Auction (1997) • Computer and VAR equipment distributor • Auctions surplus items to established customers • Removes liquidation brokers from value chain (disintermediation) • Smaller firm example • Sell excess inventory using independent third-party auction site • Dove Bid site (Ross-Dove Company) • Traditional liquidation broker E-Business, Eighth Edition

32. Business-to-Business Auctions (cont’d.) • Gordon Brothers Group (1903) example • Liquidation broker • Helps others launch liquidation Web sites • Separate subsidiary created • Dot-com company failures (2001) • Sells entire Web sites, software, hardware, intellectual property • Temporary employment example • Hospitals (and other companies) • BidShift • Sells software to employers to operate shift auctions E-Business, Eighth Edition

33. International Securities Exchange (ISE) • New York Stock Exchange, Chicago Board of Trade • Fully electronic options exchange • Threatens existing physical securities exchanges • Lower fees attract most lucrative large trades • Existing exchanges: introducing electronic trading E-Business, Eighth Edition

34. Business-to-Business Reverse Auctions • Examples: Owens Corning, U.S. Navy, General Services Administration • Acquire billions of dollars worth of materials, supplies • Agilent, BankOne, Bechtel, Boeing, Raytheon, Sony • Disadvantages • Suppliers compete on price alone • Cut corners on quality, miss delivery dates • Replaces trusting relationships with a bidding activity • Pits suppliers against each other (backward step) • Advantages • Useful for nonstrategic commodity items E-Business, Eighth Edition

35. Business-to-Business Reverse Auctions (cont’d.) • If suppliers do not agree to participate: • Impossible to conduct reverse auctions • If high degree of competition among suppliers: • Reverse auctions provides efficient way to conduct, manage price bidding E-Business, Eighth Edition

36. E-Business, Eighth Edition

37. Auction-Related Services • Entrepreneurs encouraged by eBay and other auction site growth • Provide various kinds of auction-related services • Escrow services • Auction directory and information services • Auction software • Sellers and buyers • Auction consignment services E-Business, Eighth Edition

38. Auction-Related Services (cont’d.) • Auction escrow services • Buyers’ common concern: seller reliability • Buyers protect interests in high-value items • Independent party holds payment until: • Buyer receives item • Buyer is satisfied item is as expected • May take delivery of item from seller • Perform buyer inspection (qualified to do so) • Charge fees • Percent of item’s cost; subject to minimum fee E-Business, Eighth Edition

39. Auction-Related Services (cont’d.) • Auction escrow services (cont’d.) • Examples: Escrow.com, eDeposit, Square Trade • May sell auction buyer’s insurance • Protect buyers from nondelivery and quality risks • Avoid escrow fraud • Determine if licensed, bonded (licensing agency) • Avoid offshore escrow companies entirely • Other buyer protections • Check seller’s rating • Use Web site listings of unreliable sellers E-Business, Eighth Edition

40. Auction-Related Services (cont’d.) • Auction directory and information services • Example: Auctionguide.com • Guidance for new auction participants • Helpful hints and tips • Directories of online auction sites • Example: AuctionBytes • Publishes e-mail newsletter • Online auction industry articles E-Business, Eighth Edition

41. Auction-Related Services (cont’d.) • Auction directory and information services (cont’d.) • Example: PriceWatch • Advertiser-supported site • Advertisers post current selling prices • Computer hardware, software, electronics • Example: PriceSCAN • Similar price-monitoring service • Also includes books, movies, music, sporting goods E-Business, Eighth Edition

42. Auction-Related Services (cont’d.) • Auction software • Target: sellers • Helps manage online auctions • Example: AuctionHawk and Vendio • Seller management software and services • Automate tasks • Create attractive page layouts • Manage hundreds of auctions E-Business, Eighth Edition

43. E-Business, Eighth Edition

44. Auction-Related Services (cont’d.) • Auction software (cont’d.) • Target: buyers • Helps manage online auctions • Sniping software • Observes auction progress until last second • As auction expires: places bid high enough to win (unless bid exceeds sniping software owner’s limit) • Snipe: act of placing winning bid at the last second • Almost always wins out over human bidder E-Business, Eighth Edition

45. Auction-Related Services (cont’d.) • Auction software (cont’d.) • Example: Cricket Sniping Software site • Created in 1997 by David Eccles • Companies offer sniping service • Sniping software runs on company Web site • Customer enters instructions on site • Company may offer subscriptions • Company may offer mixed-revenue model • Sniping software and services business information • AuctionBytesWeb site E-Business, Eighth Edition

46. E-Business, Eighth Edition

47. Auction-Related Services (cont’d.) • Auction consignment services • Target: people and small businesses • Want to use online auction • Do not have skills, time to become a seller • Auction consignment services • Take item and create online auction for that item • Handle transaction • Remit proceeds balance (after deducting fee) • Main auction consignment businesses • AuctionDrop, ePowerSellers, iSold It E-Business, Eighth Edition

48. Auction-Related Services (cont’d.) • Auction consignment services (cont’d.) • Key to success • Convenient locations for customer drop off • Open own stores, franchise stores • Electronic commerce first wave • Online auction business made possible by the Web • Electronic commerce second wave • Online auction business created opportunities • For even more entirely new types of business E-Business, Eighth Edition

49. Virtual Communities: Web Portals and Social Networks • Money-making Internet and Web approaches • Virtual communities • Web portals • For on-demand Internet services: • Three key required elements • Cellular-satellite (mobile) communications technology • Electronic marketplaces • Software agents • All exist today • Not yet integrated E-Business, Eighth Edition

50. Mobile Communications Technology • Cellular-satellite communications technology • Internet linking capability • Notebook computers, personal digital assistants (PDAs), mobile phones • WAP • Allows HTML-formatted Web pages to display on small-screen devices • Example: Palm Treo and other smart phones • Another approach • Possible by increased screen resolution • Display normal Web page on the device E-Business, Eighth Edition