Group
6: Elizabeth Martini, Patricia Madigan, Chris Neely, Dusti Morris & Jenny
Murphey
The focus of this paper is
to evaluate different types of Internet auctions and how they affect the
business or financial outcome to the buyer and the seller. In addition, the results of our research
will be used to support a conclusion regarding which Internet auction site is
best suited for consumers and businesses under specific circumstances. We will
provide a general overview of auction types, but will emphasize the
consumer-to-consumer (C2C) and business-to-consumer (B2C) auction models
throughout the paper. Definitions of
types of auctions and general auction rules will be discussed as well as the
different ways in which items may be auctioned off. Examples of Internet auction powerhouses will
be included followed by a synopsis of Internet fraud with concentration on ways fraudulent behavior is manifest in online auctions.
Internet auctions first appeared in 1995 and have become one of the hottest phenomena of the World Wide Web. Whether the consumer is looking for a collectible or thinking about selling old baby items, an Internet auction may be just the place to do business. It is now a well-known fact that millions of transactions take place at Internet auction sites daily. Consumers flock to the “virtual storefronts” to try and get the best deal for that rare or slightly used item.
Internet auctions can be any combination of
business-to-consumer (B2C), consumer-to-consumer (C2C), or business-to-business
(B2B) based. Operators of the
business-to-consumer auction sites have physical control of the merchandise
being offered and accept payment for the goods.
Typically, the buyer will also reap the benefits that the business
offers to customers who enter their physical storefronts, such as item warranties and the ability to return the item to the physical store location. An example of this type of auction is www.samsclub.com. Many businesses are finding
value and increased
profit in using auctions to liquidate their outdated, obsolete, or surplus
inventory. Consumers utilizing these
types of B2C auctions have the added security of dealing with businesses that
are worthy of more trust than the unknown or anonymous individual. This is a value-added advantage that the B2C
auction sites have over the C2C sites since Internet auctions account for
approximately 10% of the consumer-fraud complaints on the Internet based on
2001 statistics.[1]
In C2C and some B2C auctions, individual sellers or small
businesses offer items for auction directly to consumers. Generally, the seller—not the site—has
physical possession of the merchandise. After the auction closes, the seller is
responsible for dealing directly with the highest bidder to arrange for
payment and delivery. The advantage here is that consumers and businesses can sell
products for a minimal cost. An added
advantage to the business over the consumer seller is that they do not have to
maintain a physical storefront further reducing their cost and increasing
profit margins.
Within the realm of B2C and C2C auctions, there are many different ways in which the items may be auctioned off:
· Reverse: Buyers specify the item they want and the highest price they are willing to pay. Sellers bid to supply the items; as a result the price is bid down. The winning bidder is the seller with the lowest price. Examples: Priceline.com[5], imandi.com[6], and lendingtree.com[7]
· Dutch: This is a descending price auction that starts high and keeps declining as buyers post the quantity desired at a given price. This is good for perishable items but is also used by companies such as Sam’s Club in order to clear the entire stock of an item. The highest bidder wins the quantity available that s/he requests then moves to the next highest bidder down. Examples: within eBAY.com[8] and within samsclub.com[9]
· Haggle: Buyers and sellers can make offers and counteroffers; the sale takes place if price convergence is achieved. This is a rare form of Internet auction. Example: bargainandhaggle.com, which states that it is different than an auction in that it connects buyers and sellers to work one-on-one[10].
·
Barter: As the name
implies, individuals agree on an exchange of good or services. No money is exchanged between parties.
Example: youcanbarter.com11
Direct
auctions are also known as traditional or English auctions. Businesses and individuals list items
for sale and potential buyers bid on the items.
At the end of the auction the highest bidder will receive the item. The largest Web-based C2C auction site is eBay.com. Founded in
September 1995, eBay is the premiere online marketplace for the sale of goods
and services by a diverse community of individuals and businesses.
Inspired by his fiancée’s passion for collecting and trading Pez dispensers, Pierre Omidyar created a flea market in cyberspace when he launched the online auction service Auction Web. Making a name for itself largely through word of mouth, the company incorporated in 1996, the same year it began to charge a fee to auction items online. That same year, Auction Web enhanced its service with Feedback Forum (buyer and seller ratings). The company changed its name to eBay in 1997 and began promoting itself through advertising. By the middle of that year, eBay was boasting nearly 800,000 auctions each day and Benchmark Capital came on board as a significant financial backer. Today, the eBay community includes 42.4 million registered users, and is the most popular shopping site on the Internet when measured by total user minutes according to Media Metrix.[11] The company also provides offline traditional auction services for fine art, antiques, collectibles and collector cars. This offline auction activity only amounts to 5% of eBay.com’s revenue stream. Through the wholly owned and partially owned subsidiaries and affiliates eBay.com operates online trading platforms not only in the United States, but also in Australia, Austria, Belgium, Canada, France, Germany, Ireland, Italy, Japan, the Netherlands, New Zealand, Singapore, South Korea, Spain, Sweden, Switzerland, the United Kingdom, China, and Taiwan. The table shown below illustrates eBay’s strong financial production as compared to its industry and market sectors.[12]
eBay Comparison Data (provided by Profitability
Ratios eBay Industry Market Gross Profit
Margin 90.27% 64.46% 46.92% Pre-Tax Profit
Margin 19.40% 4.98% Net Profit
Margin 13.93% 2.23% Return on
Equity 8.20% 4.40% Return on
Assets 7.00% -59.60% 80.00% Return on
Invested Capital 8.00% -93.90% 2.20% Valuation
Ratios Price/Sales
Ratio 17.04 2.51 1.28 Price/Earnings
Ratio 122.10 64.74 Price/Book
Ratio 10.04 2.19 2.53 Price/Cash Flow
Ratio 80.13 -4.52 15.30 Growth
Rates 12-Month
Revenue Growth 68.30% 7.90% 3.90% 12-Month Net
Income Growth 63.20% -59.80% 12-Month EPS
Growth 68.00% -65.20% 36-Month
Revenue Growth 95.20% 57.90% 12.80% 36-Month Net
Income Growth 127.70% -12.40% 36-Month EPS
Growth 100.20% -25.20%
Other
direct auction sites on the Internet include Amazon.com and Ubid.com. It is notable to mention that in addition to
the core direct or English auctions these sites host, they also contain other
auctions types like Dutch Auctions, plunge pricing, and immediate buy options at
set prices.
Dutch Auctions are more common in B2C auctions. Not only are they used for perishable items like flowers, but also for obsolete or overstocked items. This is an excellent way for businesses to relieve inventory that is difficult to move while maintaining as high a profit margin as the market will allow. Plunge pricing occurs when the seller lists specific price cuts that will occur at given time intervals. This type of marketplace activity is similar to Dutch auctions in respect to the descending pricing. In this case the seller has pre-set the descended pricing, while in Dutch auctions, the buyer bids which sets up the descending pricing. In plunge pricing buyers decide at what level they will pay for an item. If there are any items left when the price drops to the one they chose, then they get the product.
In contrast to Dutch auctions,
reverse auctions such as Priceline.com has potential
buyers list the item that they want to purchase and the highest price they are
willing to pay, then the sellers (in this case Priceline) compete to meet the
request. Although reverse auctions are
not as popular as direct auctions, they certainly fill a market void or
segment, attracting consumers who have already determined the limits of what
they are willing to pay. They also enjoy
the benefit of insuring that the sellers are reputable businesses since the
transaction is made prior to the seller being named. Another example of a reverse auction is
lendingtree.com, which deals mostly with financial lending issues.
Jay Walker, founder of Priceline.com launched a string of ventures before making the leap into e-commerce. In 1994 he founded Walker Digital, an entrepreneurial think tank formed to develop business models that could germinate into new companies. In 1996, Walker Digital found the impetus that would drive priceline.com. Each day major airlines had more than 500,000 empty seats. It was determined that the airlines could cut their losses from these empty seats by offering the airfare at a much-reduced rate. The company launched its airfare service in April of 1998 and obtained financing from General Atlantic Partners and Paul Allen’s Vulcan Ventures. Priceline.com went on to expand its operations to include other items such as hotel reservations, cruises, vacations, car and home financing, and car rentals. Despite its early success among consumers and pundits, the company has not been profitable until recently. For the first time ever in 2001, the company managed to post a small profit, after a heavy string of cost cuts and scaled back advertising spending.[13]
The Internet Fraud Complaint Center (IFCC) reports that Internet auctions comprise 64% of all reported Internet fraud.[14] EMarketer, a market research company, estimates an even greater occurrence of auction fraud - 87%.[15] Consumers lost almost $4 million in 2000 in Internet auction fraud. This amount continues to escalate to more than $3.2 million in the first three months of 2001 alone.[16] The average amount of loss per complaint was $776. Penalties for auction fraud can include up to five years in a federal prison and up to $250,000 fine.[17] However, FTC officials admit they won only one conviction for auction fraud as of 2000.[18]
Government research into Internet auction fraud revealed the following facts:[19]
Internet auction fraud can take one of seven forms: non-delivery, misrepresentation, triangulation, fee stacking, black-market goods, multiple bidding, and shill bidding. Non-delivery occurs when a seller places an item up for bid when that item does not actually exist. As a result, the item is never delivered to the buyer after the buyer pays for the merchandise. Further fraud can occur if the buyer pays by credit card as the seller now has their name and credit card number. Misrepresentation happens when the seller deliberately deceives the buyer as to the true value of an item. The seller may list false information about the item or use pictures that are not the actual picture of the item up for bid. Triangulation involves the seller, a customer, and an online merchant. The seller buys the item from an online merchant using stolen identities and credit card numbers. The seller then lists the item at online auctions sites. The seller has the customer wire transfer him the money and ships the item to the customer. If the police investigate the customer and keep the stolen merchandise for evidence, the customer and the merchant become the victims of the fraud. Fee stacking happens when the seller adds hidden charges to the item after the auction is over to obtain more money. This can be separate charges for postage, handling, and packaging. Black-market goods include copied software, music CD’s, videos, etc. These goods are delivered without factory packaging, warranties, or instructions. Multiple bidding involves the buyer placing multiple bids on the item using different aliases, escalating the price. Shill bidding is the intentional fake bidding by the seller to drive up the price of his or her own item.
Several Internet sites are available for the consumer to report fraud or get more information regarding Internet auction fraud. Some of these include the following:
|
The FTC Guide to Internet Auctions for Buyers and Sellers (http://www.ftc.gov/bcp/conline/pubs/online/auctions.htm |
|
Internet Scambusters (http://www.scambusters.org/Scambusters21.html) |
|
National Fraud Information Center (http://www.fraud.org/) |
|
Auction Blacklist (http://www.auctionblacklist.com/) |
|
The US Postal Inspection Service (http://www.usps.com/postalinspectors/fraud/welcome.htm) |
|
The FBI's Internet Fraud Complaint Center (http://www1.ifccfbi.gov/index.asp) |
|
Department of Justice Internet Fraud Site (http://www.usdoj.gov/criminal/fraud/Internet.htm#What%20Is%20Internet%20Fraud) |
|
http://www.wired.com/news/politics/0,1283,44831,00.html (eBay fraud) |
|
http://www.cnn.com/2000/TECH/computing/11/07/suing.ebay.idg/ |
In addition, large
auction sites such as eBay are trying to control Internet auction fraud
themselves. eBay
said it would begin enforcing a prohibition on offline deals between members
due to complaints since buyers who conduct business outside of eBay are not
protected by the company’s insurance program or feedback system. Those not following this policy will be
banned from using eBay.[20] eBay has also become
more vigilant in blocking some of the more offensive items offered by its
sellers after the
In conclusion, for the specific circumstances surrounding an average consumer, based on our research the best Internet auction site is eBay.com. It services the widest variety of consumer goods, while protecting the consumer from fraud. It also creates a well-rounded “community” in which to do business by connecting sellers to buyers and allowing the communication exchange of peer evaluation. As consumers and investors we would recommend using this site and potentially investing in this company. In addition to eBay.com there are a few niche Internet Auction sites worthy of mention. Priceline.com and lendingtree.com also provide excellent consumer values and service for travel and lending respectively. For an easy to read guide sheet that summarizes some of the auction sites mentioned in this paper please refer to the spreadsheet on the following page.
Type Offerings Value Proposition Financial Performance Stock Price Ebay.com Auction eBay developed a Web-based community in which buyers
and sellers are brought together in an efficient format to buy and sell
items, such as collectibles, automobiles, high-end or premium art items,
jewelry, consumer electronics and a host of practical and miscellaneous
items. The eBay dynamic pricing
(auction-style) format permits sellers to list items for sale, buyers to
bid on items of interest and all eBay users to browse through listed
items. eBay's service is fully automated,
topically arranged and easy to use. For the fiscal year
ended $49.70 Amazon.com Auction Amazon.com, Inc. is a
Website where customers can find and discover anything they may want to
buy online. The Company lists millions of unique items in categories such
as books, music, DVDs, videos, consumer electronics, toys, camera and
photo items, software, computer and video games, tools and hardware, lawn
and patio items, kitchen products, and wireless products. Through its Amazon
Marketplace, Auctions and zShops services, any business or individual can
sell virtually anything to the Company's approximately 30 million
cumulative customers, and with Amazon.com Payments, sellers can accept
credit card transactions. For the three months
ended $16.90 Yahoo! Auctions Auction Yahoo! Inc. is a global
Internet communications, commerce, and media company that offers a branded network of services to millions of
users daily. Through strategic
arrangements with hundreds of brands and thousands of specialty
merchants/sellers, the Company offers its consumers the opportunity to
purchase a wide variety of new and used goods and services ranging from
consumer electronics, apparel, books and flowers, to travel services such
as airfare, hotel and car rentals, as well as cruises and vacation
packages. For the three months
ended $14.50 Priceline.com Reverse priceline.com has developed a new type of e-commerce where
customers enter prices they're willing to pay for products or services
and then the Company contacts sellers to determine whether they can
fulfill the customer's offer. Using its consumer
proposition, "Name Your Own Price," the Company collects
consumer demand, in the form of individual customer offers, for a
particular product or service at a price set by the customer. For the fiscal year
ended $5.19 Free Markets, Inc. Reverse FreeMarkets, Inc.
creates business-to-business online auctions (Markets) and provides
software and services to help buyers purchase or source industrial parts,
raw materials, commodities and services. The Company's sourcing
solutions combine Web-based technology, market operations, supply market
information and commodity expertise so that its customers can identify
savings and enhance the efficiency of the process by which they source
goods and services. For the fiscal year
ended $20.48
1 Ina Steiner,
FTC Says Internet Auction Fraud Is #2 Complaint,
URL: http://www.auctionbytes.com/pages/abn/y02/m01/i24/s01,
[2] http://pages.ebay.com/community/aboutebay/overview/index.html
[5] http:www.priceline.com
[6] http://imandi.com/
[7] http://lendingtree.com/stm/default.asp
[8] http://pages.ebay.com/help/basics/g-dutch-auction.html
[9] http://auctions.samsclub.com/Scripts/LotSearch.asp?submitFlag=1&saletype=1&SortBy=4&merchflag=1&TitleOnly=N&ProdName=(ltfma,ltfmd)&auction&submit1=Search&SearchMode=gallery
[10] http://bargainandhaggle.com
[11] http://youcanbarter.com/
[12] http://80-www.hoovers.com.ezproxy.lib.utexas.edu:2048/premium/profile/7/0,2147,56307,00
[13] http://80-www.hoovers.com.ezproxy.lib.utexas.edu:2048/premium/profile/7/0,2147,58847,00
[15] eMarketer, The ePrivacy and Security Report, January 2001.
[16] www1.ifccfbi.gov/strategy/AuctionFraudReport.pdf.
[17]
Brian Krebs, FTC Seeks to Stem Online
Auction Fraud, URL: http://www.newsbytes.com/news/00/143828.html,
[18] Ibid.
[19] www1.ifccfbi.gov/strategy/AuctionFraudReport.pdf.
[20]
Clare Saliba, Study: Auction Fraud Still
Top Cybercrime, URL: http://www.ecommercetimes.com/perl/story/6590.html,
[21]
Adam Goodheart, Why Buy a Piece of 9/11?,
URL: http://story.news.yahoo.com/new?tmpl=story&u=usatoday/20020328/cm_usatoday/39773,