Lecture 11

WEB (Online) Auctions

An online auction is an auction which is held over the internet. Online auctions are sales
transactions involving competitive bidding that are conducted over the Internet. Whether the sales
take place between individuals, between consumers and merchants, or between businesses, online
auctions have enjoyed a rapid increase in popularity.

In many ways, online auctions provide a business opportunity that is perfect for the Web. An
auction site can charge both buyers and sellers to participate, and it can sell advertising on its
pages. People interested in trading specific items can form a market segment that advertisers will
pay extra to reach. Thus, the same kind of targeted advertising opportunities that search engine
sites generate with their results pages are available to advertisers on auction sites. This combination
of revenue-generating characteristics makes it relatively easy to develop online auctions that yield
profits early in the life of the project.

Origin of Auctions

Online auctions were taking place even before the release of the first web browser for personal
computers, NCSA Mosaic. Instead of users selling items through the Web they were instead
trading through text-based newsgroups and email discussion lists. However, the first Web-based
commercial activity regarding online auctions that made significant sales began in May 1995 with
the company Onsale. In September that same year eBay also began trading.

In an auction, a seller offers an item or items for sale, but does not establish a price. This is called
“putting an item up for bid” or “putting an item on the (auction) block.” Potential buyers are given
information about the item or some opportunity to examine it; they then offer bids, which are the
prices they are willing to pay for the item. The potential buyers, or bidders, each have developed
private valuations, or amounts they are willing to pay for the item. The whole auction process is
managed by an auctioneer. In some auctions, people employed by the seller or the auctioneer can
make bids on behalf of the seller. These people are called shill bidders. Shill bidders can
artificially inflate the price of an item and may be prohibited from bidding by the rules of a
particular auction.

Types of Online Auctions

There are six types of online auctions

English Auctions

An English auction is a type of auction, whose most typical form is the "open outcry" auction.
The auctioneer opens the auction by announcing a Suggested Opening Bid, a starting price or
reserve for the item on sale and then accepts increasingly higher bids from the floor consisting of
buyers with a possible interest in the item. Unlike sealed bid auctions, "open outcry" auctions are
"open" or fully transparent as the identity of all bidders is disclosed to each other during the
auction. The highest bidder at any given moment is considered to have the standing bid, which can
only be displaced by a higher bid from a competing buyer. If no competing bidder challenges the
standing bid within a given time frame, the standing bid becomes the winner, and the item is sold
to the highest bidder at a price equal to his or her bid. This type of auction is sometimes called an
ascending-price auction.

English auction in some cases have minimum bid or reserve price. A minimum price bid is the
price at which an auction begins. If no bidders are willing to pay that price, the item is removed
from the auction and not sold. On the other hand in some cases a minimum price is announced,
but sellers can establish a minimum acceptable price called reserve price. If reserve price is not
exceeded, the item is withdrawn from auction and not sold.

Dutch Auctions

A Dutch auction is a type of auction in which the auctioneer begins with a high asking price which
is lowered until some participant is willing to accept the auctioneer's price, or a predetermined
reserve price (the seller's minimum acceptable price) is reached. The winning participant pays the
last announced price. This is also known as a clock auction or an open-outcry descending-price
auction.

One common implementation of Dutch auction uses a clock that drops the price with each tick.
The first bidder to call out “stop”, which stops the clock, becomes the winner.

Sealed Bid Auctions

In Sealed Bid Auction, bidders submit their bids independently and are usually prohibited from
sharing information with each other. In a first-price sealed-bid auction, the highest bidder wins.
The second price sealed bid is same as the first-price sealed-bid auction except that the highest
bidder is awarded the item at the price bid by the second-highest bidder.

Vickrey Auctions

A Vickrey auction (a type of sealed bid auction), sometimes known as a Second-price sealed-bid
auction, uses very much the same principle as a first-price sealed bid. However, the highest bidder
and winner will only pay what the second highest bidder had bid.

Double Auctions

A double auction is a process of buying and selling goods when potential buyers submit their bids
and potential sellers simultaneously submit their ask prices to an auctioneer, and then an auctioneer
chooses some price p that clears the market: all the sellers who asked less than p sell and all buyers
who bid more than p buy at this price p.
Reverse Auctions

Reverse auctions are where the roles of buyer and seller are reversed. Multiple sellers compete to
obtain the buyer's business and prices typically decrease over time as new offers are made.
Multiple sellers submit price bids to an auctioneer who represents a single buyer. The bids are for
a given amount of a specific item that the buyer wants to purchase. The prices go down as the
bidding continues until no seller is willing to bid lower.

Virtual Communities and Web Portals

The Internet reduces transaction costs in value chains and offers an efficient means of
communication to anyone with an Internet connection. Combining the Internet’s transaction cost
reduction potential with its role as a facilitator of communication among people, companies have
developed two other new approaches to making money on the Internet and the Web: virtual
communities and Web portals.

A virtual community, also called web community or an online community is a gathering place
for people and businesses that do not have a physical existence. Virtual communities exist on the
Internet in various forms, including Usenet newsgroups, chat rooms, and Web sites. Virtual
communities help companies, customers, and suppliers to plan, collaborate, transact business, and
interact in ways that benefit all of them.

A Web Portal is a website that brings information together from diverse sources in a uniform way.
Usually, each information source gets its dedicated area on the page for displaying information (a
portlet); often, the user can configure which ones to display. Apart from the standard search
engines feature, web portals offer other services such as e-mail, news, stock prices, information,
databases and entertainment. Portals provide a way for enterprises to provide a consistent look and
feel with access control and procedures for multiple applications and databases, which otherwise
would have been different entities altogether. Examples of public web portals are AOL, Excite,
iGoogle, MSN, Naver, Indiatimes, Rediff, Sify and Yahoo!.

Early Web Communities

One of the first Web communities was the WELL. The WELL, which is an acronym for “whole
earth ‘lectronic link,” predates the Web. It began as a series of dialogs among the authors and
readers of the Whole Earth Review in 1985. Most WELL members were originally from the San
Francisco Bay area, and the influence of that area’scounterculture heritage is a significant part of
the WELL’s ambiance. Members of the WELL pay a monthly fee to participate in its forums and
conferences. The WELL has been home to many important researchers and participants in the
growth of the Internet and the Web

Web Community Consolidation

Virtual communities for consumers can succeed as money-making propositions if they offer
something sufficiently valuable to justify a charge for membership. For example, people joining
the WELL community obtain access to a very interesting set of existing members who frequent
the WELL’s discussion areas. These areas are open only to members. Thus, WELL owner
Salon.com can charge a subscription fee for access to the WELL community.

Web Communities in the Second Wave of Electronic Commerce

In the early days of the Internet, virtual communities were an essential part of the online experience
for the small number of people who regularly used the medium. As the Internet and Web grew,
some of these communities grew, but others found that their purpose as a place for sharing the new
experiences of online communication began to fade. In the second wave of electronic commerce,
a new phenomenon in online communication began. People who were now using the Internet no
longer found a common bond in the fact that they were using the Internet. Multiple common bonds
joined people with all types of common interests. The Internet was no longer the focus of the
community, but was simply a tool that enabled communication among members of the community.

Web Portal Strategies

By the late 1990s, virtual communities were selling advertising to generate revenue. Search engine
sites and Web directories were also selling advertising to generate revenue. Beginning in 1998, a
wave of purchases and mergers occurred among these sites. The new sites that emerged still used
an advertising-only revenue generation model and included all the features offered by virtual
community sites, search engine sites, Web directories, and other information-providing and
entertainment sites

Advertising-supported Web portals

Some Web observers believe that Web portal sites could be the great revenue-generating
businesses of the future. They argue that adding portal features to existing sites or converting sites
to portals can be a wise business strategy. They believe that combining Web communities’ sense
of belonging with search engine and Web directory tools will yield Web sites with high degrees
of stickiness that will be extremely attractive to advertisers.

Mixed-Revenue Web portals and Virtual Communities

One of the of the most successful Web portals is Time Warner’s AOL unit, which has always
charged a fee to its users and has always run advertising on its site. Many Web portals that have
struggled with their advertising-supported revenue models have been moving toward AOL’s
strategy.

Internal Web portals

A growing number of large organizations have built Web portals to provide information to their
employees. These portals can save significant amounts of money by replacing the printing and
distribution of paper memos, newsletters, and other correspondence with a Web site.
Organizations use internal Web portals to publish employee handbooks, newsletters, and
employee benefits information. These organizations are also finding that the internal portal Web
site can become a good way of creating a virtual community among employees who are
dispersed over a wide geographic area