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 fact, some business analysts claim that online auctions – by giving both buyers and sellers access to a vast global marketplace – have created a whole new way of doing business.  Online auctions are a method of commerce that did not really exist several years ago and couldn’t exist offline on the scale it does online.


As of 2000, the majority of traffic at online auctions consisted of transactions between individuals on hosted sites like eBay. The consumer online auction process has been described as being similar to a garage sale, with commonly offered items including collectibles, antiques,  toys, clothing, and event tickets.  Online auctions appeal to individuals who enjoy the competitive bidding process and like to feel as if they are getting a bargain.  Most web sites that host auctions allow buyers and sellers to negotiate payment methods and shipping details. Costs are usually limited to a small percentage of the final sales price. 

Although individuals comprise the majority of current online auction participants, the future growth of the industry is expected to be driven by business-to-business and business-to-consumer auctions. Online auctions offer potential benefits to all types of businesses. Many companies wonder when and why they should use online auctions as part of their business trading strategy. The short answer is, if you sell goods and services or if you purchase items to run your business, online auctions can work for you.  Companies of practically any size and within any industry can benefit from them

Internet analysts note that online retailers who incorporate auctions into their sales activities tend to see a higher level of repeat visits, more frequent purchases, and increased promotional opportunities compared to other online retailers. Auctions also offer advantages for those businesses interested in selling to or buying from other businesses. Some businesses choose to host closed or private auctions for their existing business contacts. But online auction companies may be able to assist companies in enlarging the audience for auctions by analyzing the bidding patterns of previous auctions to identify potential new customers.


Benefits of Online Auctions

 Online auctions offer businesses a number of potential benefits with very few risks.  After all, participating in online auctions does not prevent businesses from continuing to use traditional sales methods. In addition, companies can avoid financial losses on sales items by setting the minimum bid price high enough to cover costs.  Among the few potential drawbacks are that the buyers are not able to personally view and evaluate items before making a purchase, which raises the possibility of fraud. It can also be difficult to integrate online auction technology with the business’s procurement systems. Finally, a company that decides to host auctions on their websites may need to hire additional information technology staff.


Whether a business participates in online auctions on a hosted site or sets up its own auction website, buying and selling items online offers a number of potential benefits.  Online auctions can help businesses reduce their distribution costs.  Items to be sold online can be stored in one location until they are ready for shipping. This reduces the time and the money spent on packaging items for distribution to intermediaries, such as retail stores, and also helps eliminate the problems of damaged and missing goods.

Another major benefit of online auctions is that they enable businesses to reduce their levels of surplus inventory, along with associated inventory carrying costs.  Many businesses encounter problems disposing of seasonal, discontinued, or damaged goods. They either keep such items in inventory indefinitely, or end up marking down the prices until the items are sold at a loss. Online auctions provide a method for businesses to sell surplus inventory, often at a profit, and eliminate the expense of storing older merchandise. 

Online auctions hold two other potential benefits for businesses, as well. First, buying and selling over the Internet can help expand the global reach of a small business, opening international markets that could have been impossible to reach via normal marketing channels.  Second, auctions can help new businesses – or those offering new products – to establish market prices based on supply and demand. Businesses can use online auctions to gauge interest in their products and find out what customers are willing to pay.  Furthermore, companies can collect such information quickly and informally, rather than investing in time-consuming and expensive market research. 


Types of Auctions

Whatever level of involvement a business chooses, it is important to understand the various types of online auctions available.  The most common type of auction is known as an open cry option. In this type of auction, budding typically begins low – either at zero or at a previously specified minimum bid – and proceeds upward quickly by increments. All potential buyers are usually made aware of the current bid and receive an equal chance to increase it.  Open cry auctions tend to work best when buyers feel comfortable valuing the merchandise quickly.

 Another type of auction is a sealed bid auction. In this case, the potential buyers receive no information about other bidders, including the amount bid.  An example of a sealed bid auction is when a company bids from a number of vendors before awarding a contract.  This type of auction is useful when potential buyers are unable to prepare bids quickly, or when the seller does not want bidders to have information about each other. 

A Dutch auction basically works backward. Items are initially offered at a high price, and the price is gradually reduced until a bidder offers to buy at that price. The first person to bid is allowed to purchase the sale item.  This type of auction is useful when a business is selling a few expensive items with high demand.  In a second price auction, each potential buyer bids the most he or she is willing to pay for the item.  Then the current bid amount is gradually adjusted downward until all the items have been sold.  This type of auction generally works well when bidding is slow and the auction takes place over an extended time period. 

In a forward auction, multiple buyers compete to buy things from an individual seller through a bidding process. In a reverse auction, however, one buyer requests a certain good or service from a number of sellers. The sellers then bid for the right to make the sale.  Reverse auctions are expected to play a growing role in business-to-business transactions on the Internet, particularly for large, one-time purchases, such as a fleet of automobiles.

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