Electronic Auction Markets: Ebay Explored

Introduction

Electronic commerce has had a great impact on the global economy since its entry in the last decade, especially on the internet. The total retail revenue of e-commerce is represented by a growth rate larger than 25 percent (US Department of Commerce, 2005). "Despite the contraction in the high-tech industry during the recent recession, firms have continued to enter and expand their presence in e-commerce, and consumers have increased the number of purchases made online. As e-commerce grows, so will its impact on the overall economy" (Willis, 2004). One of the main drivers behind the growing success of e-commerce is online auctions. A growing amount of people interacts with online auctions on a regular basis. The consumer-to-consumer based auctions have become one of the most successful methods of electronic commerce (Zhang, 2006), such as including eBay.com, Yahoo! Auction, and Amazon Auction. One special case is eBay.com, which has grown to become the most popular online auction website (MarketingVOX, 2006). With up to 57.6 million visits in September this year (Internet Retailer, 2006), eBay leaves all competition behind. The question arises: Should eBay fear for more threatening competition in the future?

To investigate this dilemma, this paper analyses in depth the functioning of internet auctions in general and specializes on eBay and its competition. Section 2 clarifies the definition of internet auctions and their functioning, and describes the position of the internet auction market. Section 3 reflects on the relation between the classical model of supply and demand and auctions, discussing similarities and differences. Section 4 discusses the typical bidding behavior of eBay users by analyzing possible positive and negative implications. Section 5 discusses competition in the internet auction market from the perspective of eBay and evaluates possible threats in future. Finally, section 6 concludes by stating that eBay should indeed fear for more threatening competition in the future for various reasons including the rapid emergence of small scale auction websites.

1. Internet auctions

Internet auctions can be defined as "a usually public sale of goods or property, where people make higher and higher bids for each item, until the item is sold to the person who will pay most" (Cambridge Dictionaries, 2006). Next to eBay.com there are a number of other online auction websites, such as Yahoo! Auction, Amazon Auction, Bidville, and Ubid. These three can be categorized as the major players in the world of online auction websites. Different auction websites have different auction rules and bidding procedures. For example eBay has its own procedure of how to bid on and sell items in its auction system. At the moment a potential buyer places a bid on an item, this person is automatically obliged to a contractual agreement in the event of a win (eBay.com, 2006). EBay enforces all auctions to have a minimum starting bid and a reserve price. This reserve price acts as the minimum price the seller is willing to accept for the item. Any auction that does not reach up to the reserve price, will fail and the seller does not have the obligation to provide the item. Another function of the eBay auction system is the "Buy it Now" option. This option provides the buyer with an opportunity to buy the item immediately for a fixed price reasonably higher than the start price, which consequently ends the auction.

As the largest online auction website, eBay possesses a steady market share of roughly 70% (Phillips, Somok & Zheng, 2005). The remaining 30% are to be divided among Yahoo! Auction, Amazon Auction, Bidville, Ubid, and all small scale auction websites. With over 57 million hits a month its traffic is on the market's top end (Internet Retailer, 2006). "An article of clothing is sold on eBay every 3 seconds. A car is sold every 90 seconds. And 30,000 pieces of jewelry are sold daily. eBay does 23 billion dollars in annual transactions, and an estimated 400,000 people make their living through eBay" (Alberta E-Future Centre, 2005, p.3).

2. Classical model of supply & demand versus auctions

In classical economics two factors determine price: supply and demand. Supply reflects the quantity of goods a producer is willing to sell at a respective fixed price. Demand on the other hand, reflects the amount of money consumers are willing to pay for the goods supplied. "According to the law of demand, demand decreases as the price rises. In a perfectly competitive economy, the combination of the upward-sloping supply curve and the downward-sloping demand curve yields a supply and demand schedule that, at the intersection of the two curves, reveals the equilibrium price of an item" (Klein, 1983), as illustrated in figure 1.

Unlike in the classical model, auction prices are not determined by the market (law of supply and demand) but instead they are determined by the seller. This individual has the ability to sell an item at any price. In the classical model, demand is clear and can be visualized as in figure 1. In auctions on the other hand, demand is vague and infinite. If a seller places an item, demand will not be measurable until potential buyers place their bid. "In a perfectly competitive economy, the combination of the upward-sloping supply curve and the downward-sloping demand curve yields a supply and demand schedule that, at the intersection of the two curves, reveals the equilibrium price of an item (Klein, 1983). McDowell et al. (2006) suggest that the equilibrium price is the price for which both demand and supply have no incentive to change. This brings up another significant difference, namely in auctions there is no such thing as one fixed equilibrium price. With every bid a potential buyer places the equilibrium price changes, since there will always be a buyer who will overbid another potential buyer. This results in a very fluctuating equilibrium that is hard to define (Davis & Holt, 1993, p.281-291).

One factor both the classical model and auctions have in common is that both recognize price elasticity. The price elasticity of supply and demand of a good is a measure of the responsiveness to price changes or quantity changes (McDowell et al., 2006). This suggests that when elastic prices increase, quantity demanded will decrease and vice-versa. Furthermore, in auctions such as eBay this concept applies because when bids on an item go up, the number of bidding buyers gradually tends to decline due to their budget constraint.

3. eBay last-minute bidding

With regard to the many possibilities of bidding techniques on eBay, one particularly interesting