Internet Auctions

Internet Auctions

-Competition on the German market and the advantage of auctioning rare goods-

Table of contents

Introduction.................................................................................................2

1.) What internet auction types exist?

2.1.) Description of Hood as eBays largest German competitor.............................3

2.2.) The impact of seller's reputation on buying behaviour exemplified on Hood.....4

3.) Application of economic theory...............................................................5

Conclusion..............................................................................................6

References.............................................................................................8

Introduction

Every purchase causes a meeting of demand and supply, of buyer and seller. This can take place in several forms, in a traditional exchange of money for a product or service, or in an auction. With the development of the internet, the online auction was created and the first one started operating in 1995 (Pinker, Seidmann and Varkant, 2003). In traditional auctions, as well as on the online auction market, buyers bid to get the lowest possible price, while sellers offer their products to get the highest reservation price of the buyer. Indeed this seems paradoxical at first sight, but auction houses and especially internet auctions are, and tend to become even more successful. They are the best indicators for the changes to "business inherent in e-commerce" (Pinker et al., p.1457). In an online auction, the exchange of value takes place on a virtual basis, providers offer a platform, the virtual marketplace, for the transactions. "They must communicate supply and demand orders, transform these orders into transactions, and provide sufficient liquidity for the market" (Pinker et al., p.1478). The probably best known and worldwide largest online auction market is eBay, with a monopolistic position in a large number of the world's countries. Nevertheless, this paper will argue that especially in Germany providers as Hood gain a competitive edge in the online auction business and attempt to weaken the position of eBay. Furthermore it will be argued that particularly rare goods are suitable for online auctions, based on the economic concept of price discrimination.

The following essay will outline basic information about different types of online auctions, followed by a description of Hood, eBays strongest competitor in Germany, and the examination of the effects of seller's feedback. The last focal point will be the integration of online auctions into economic theories and an analysis of the welfare effects resulting from online auctions.

1.) What internet auction types exist?

Internet auctions differ in their bidding system, in the types of consumer and seller, in their regulations and in various other characteristics. A first determinant is the model of bidding behaviour an auction site uses. According to Pinker, Seidmann and Varkant the most common one is the English auction, where the participants bid openly against each other and where the bidder with the highest reservation price and offer receives the good. In Dutch auctions the auctioneer begins with a high price and lowers it constantly until a buyer is willing to accept the price. In addition sealed-bid first-price auctions and sealed-bid second-price auctions can be used. All participants submit their bid simultaneously and the highest bidder pays his price or the second highest offer (2003). Another important factor of differentiation is the type of seller and the target market. There exist mainly Consumer-to-Consumer markets, Business-to-Consumer markets, as well as Business-to-Business markets. Many companies recognize the advantages of the internet as a new sales channel, or as a possibility to reduce inventory (Pinker et al.). Online auctions can be seen as the democratisation of the internet, because everyone with access to an internet connection can become a merchant (Pinker et al.). However this implies also certain dangers and possibilities for fraud. Hosts as eBay try to establish control mechanisms. For instance, registration and acceptance of FAQ's before the first use of the platform or the possibility of evaluating a seller after a transaction, but they do not compensate for value losses or failed exchanges. Nevertheless, they should act as a "trusted third party who will not manipulate the auctions to anyone's advantage" (Pinker et al., p.1478). The variety of online auctions establishes a marketplace for everyone while at the same time a basis for economic fraud and illegal prosperity is created.

2.1.) Description of Hood as eBays largest German competitor

It was already indicated that eBay is the worldwide major player of online auctions, but its reputation and winning margin minimizes. Competitors as Hood (www.hood.de) in Germany try to endanger eBays competitive edge with alternative business ideas and through differentiation. However, they are far from creating an oligopoly. Hood was established by the entrepreneur Ryan Hood in 2000. It developed to be the self-claimed, second largest auction site in Germany and can be used completely cost free. With this principle Hood already attracted about half a million customer and is close to reach the one million barrier of daily sold goods with 900000 (Brechtel, 2006). The online auction market is financed through advertisement and Ryan Hood promises to stay free of costs in the future. An exception is the possibility to present a product on the front-page gallery of Hood. In 2005 the auctioneer registered that 36 million Euros where exchanged through the platform (Hood, 2006). Despite of the growing demand Hood is facing, they still want to emphasize the strong direct linkage they try to maintain to their users. The objective is to offer fast solutions to occurring problems and to design the page most practically for their consumers (Hood, 2006). The company also tries to support a "Hood-Community", where users can meet in virtual cafes to make announcements about their offers, their demand or simply about