E-Business
Eighth Edition
Chapter 6
Online Auctions, Virtual Communities,
and Web Portals
Learning Objectives
In this chapter, you will learn about:
• Origins and key characteristics of the seven major
auction types
• Strategies for Web auction sites and auction-related
businesses
• Virtual communities and Web portals
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Auction Overview
• Business use of the Web
– Improve existing processes
– New items
• Running auctions
• Creating virtual communities
• Operating Web portals
• Online auctions provide business opportunity
– Charge buyers and sellers
– Sell targeted advertising
• Strength of Internet
– Brings people together: common narrow interest
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Origins of Auctions
• From Babylon to the Roman Empire to Buddhists
• Common activity of 17th century England
– Sotheby’s (1744), Christie’s (1766), colonial auctions
• Auction: seller offering item for sale
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–
–
–
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Bids: price potential buyer willing to pay
Bidders: potential buyers
Private valuations: amounts seller willing to pay
Auctioneer: manages auction process
Shill bidders: bidder who seller or auctioneer
employees
• May artificially inflate price
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English Auctions
• Bidders publicly announce successively higher bids
– Stop at highest bid
• Item sold to highest bidder (at bidder’s price)
• Also known as:
– Ascending-price auction
– Open auction (open-outcry auction)
• Bids publicly announced
• Minimum bid
– Beginning price
– If not met: item removed (not sold)
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English Auctions (cont’d.)
• Reserve price (reserve)
– Seller’s minimum acceptable price
– Not announced
– If not exceeded: item withdrawn (not sold)
• Yankee auction
– Multiple item units offered for sale
• Bidders specify quantity
– Highest bidder allotted bid quantity
– Remaining items allocated to next highest bidders
• Until all items distributed
– Bidders pay lowest successful bidder price
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English Auctions (cont’d.)
• English auction seller drawback
– May not obtain maximum possible price
• English auction buyer drawback
– Winner’s Curse
• Psychological phenomenon
• Caught up in competitive bidding excitement
• Bidders risk bidding more than their private valuations
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Dutch Auctions
• Open auction
– Bidding starts at a high price
• Drops until bidder accepts price
• Also called descending-price auctions
• Seller offers number of similar items for sale
• Common implementation
– Use a clock (price drops with each tick)
• If items remain: clock restarted
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Dutch Auctions (cont’d)
• Advantages
– Seller obtains close to highest private valuation
– Quickly move large numbers of commodity items
• Disadvantages
– Sales or product interest generated: does not justify
cost of operation
– Customer confusion
• Successful examples
– Google initial public offering stock sale (2004)
– LookSmart stock repurchase (2008)
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First-Price Sealed-Bid Auctions
• Sealed-bid auctions
– Bidders submit bids independently
• Prohibited from sharing information
• First-price sealed-bid auction
– Highest bidder wins
– If multiple items auctioned: next highest bidders
awarded remaining items
• At their bid price
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Second-Price Sealed-Bid Auctions
• Second-price sealed-bid auction
– Same as first-price sealed-bid auction
• Exception
– Highest bidder awarded item at second-highest
bidder price
• Vickrey auctions
– William Vickrey: 1996 Nobel Prize in Economics
• Yields higher seller returns
• Encourages all bidders to bid private valuation amounts
• Reduces tendency for bidder collusion
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Open-Outcry Double Auctions
• Open-outcry double auctions
– Sealed bid or open outcry
– Good for: items of known quality traded in large
quantities
– No item inspection before bidding
• Example
– Chicago Board of Trade: commodity futures and stock
options
– Buy and sell offers shouted by traders in trading pit
• Each commodity, stock option traded in own pit
• Quite frenzied
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Sealed-Bid Double Auctions
• Double auction
– Buyers, sellers submit combined price-quantity bids
• Auctioneer
– Matches sellers’ offers
• Starting with lowest price and then goes up
– To buyers’ offers
• Starting with highest price and then goes down until all
quantities offered are sold
• Operation format
– Sealed bid or open-outcry
• Example: New York Stock Exchange
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Reverse (Seller Bid) Auctions
• Reverse auction (seller-bid auction)
– Multiple sellers submit price bids
• Auctioneer represents single buyer
– Bids for given amount of specific item to purchase
– Prices go down as bidding continues
• Until no seller is willing to bid lower
• Used by consumers
• Largest dollar volume
– Businesses: both buyers and sellers
• Buyer acts as auctioneer
• Screens sellers before participation
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Online Auctions and Related
Businesses
• Online auction business is rapidly changing
• Three auction Web site categories
– General consumer auctions
– Specialty consumer auctions
– Business-to-business auctions
• Consumer auctions
– Considered business-to-consumer e-commerce
– E-commerce
• Considered Consumer-to-business
• Bidders might be businesses
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General Consumer Auctions
• eBay
– Registration required, seller fees, rating system
– Seller’s risk
• Stolen credit cards; buyer fails to conclude transaction
– Buyer’s risk
• No item delivery; misrepresented item
– Most common auction format: English auction
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•
•
•
Seller may set reserve price
Bidders listed: bids not disclosed (until auction end)
Continually updated high bid amount displayed
Private auction option
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General Consumer Auctions (cont’d.)
• eBay (cont’d.)
– Minimum bid increment
• Amount by which one bid must exceed previous bid
– Proxy bid
• Bidder specifies maximum bid
• May cause bidding to rise rapidly
• eBay stores
– Integrated into auction site
– Sellers generate additional profits
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General Consumer Auctions (cont’d.)
• eBay’s success
– No specific audience
– Advertises widely ($800 million yearly: mass media
outlets)
• Major determinants of Web auction
– Attracting enough buyers and sellers
• Creating markets in many different items
• Yahoo! (closed in 2007)
• Amazon.com (“Auctions Guarantee”: closed in 2006)
– Offered buyer protection through Escrow service
• Overstock.com (still active)
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General Consumer Auctions (cont’d.)
• Lock-in effect
– Economic structure of markets
• Based against new entrants
– Markets become more efficient
• As number of buyers and sellers increases
– Example: Japanese general consumer auction
• Yahoo! dominates (97%)
• eBay maintains low market share (3%)
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Specialty Consumer Auctions
• Specialized Web auction sites
– Meet special-interest market needs
– No need to compete with eBay
• Early Web auction sites (first wave)
– Featured technology items
• Doug Salot: Haggle Online (now uBid)
• Other specialized auction sites (second wave)
– JustBeads.com, StubHub
– Cigarbid.com, Golf Club Exchange, Winebid
• Strong market segments; readily identifiable products
• Desired by people with high disposable incomes
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Consumer Reverse Auctions and
Group Purchasing Sites
• Reverse bid
– Visitor describes desired items or services
– Site routes visitor to participating merchants
• Reply to visitor by e-mail
• Offer item at particular price
– Buyer accepts
• Lowest offer
• Offer best matching buyer’s criteria
• All these types of sites now closed
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Consumer Reverse Auctions and
Group Purchasing Sites (cont’d.)
• Priceline.com
– Considered a seller-bid auction site
– Visitor states desired airline ticket, car rental, hotel
room price
• If sufficiently high price: transaction completed
– Many transactions come from inventory
• Priceline operates more as a liquidation broker
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Consumer Reverse Auctions and
Group Purchasing Sites (cont’d.)
• Group purchasing site
– Similar to consumer reverse auction
– Seller posts item with price
– Individual buyers enter bids
• Agreement to buy one unit (no price provided)
• Site can negotiate with item’s provider for better price
– Posted price decreases
• As number of bids increases (only if number of bids
increases)
– Result: buyers force seller to reduce price
• Like consumer reverse auction
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Consumer Reverse Auctions and
Group Purchasing Sites (cont’d.)
• Well-suited product types
– Branded products, well-established reputations
• Produces buyer confidence of good bargain
– High value-to-size ratio
– Non-perishable
• Disadvantages
– Difficulty attracting sellers’ interest
– Well-suited companies
• Find no advantage, fear sites cannibalize product
sales, reluctant to offend current distributors
• Group purchasing sites fell apart
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Business-to-Business Auctions
• Evolved to meet specific existing need
– Excess inventory disposal (manufacturing)
• Two traditional methods
– Large companies
• Liquidation specialists find buyers for unusable items
– Small companies
• Liquidation broker firms find buyers for items
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Business-to-Business Auctions
(cont’d.)
• Emerging business-to-business Web auction models
– Direct descendants of traditional methods
– Large-company model
• Business creates its own auction site
– Small-company model
• Third-party Web auction site instead of liquidation
broker
• Resembles consumer online auctions
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Business-to-Business Auctions
(cont’d.)
• Large-company model example
– Ingram Micro’s Auction (1997)
• Computer and VAR equipment distributor
• Auctions surplus items to established customers
• Removes liquidation brokers from value chain
(disintermediation)
• Smaller firm example
– Sell excess inventory using independent third-party
auction site
– Dove Bid site (Ross-Dove Company)
• Traditional liquidation broker
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Business-to-Business Auctions
(cont’d.)
• Gordon Brothers Group (1903) example
– Liquidation broker
– Helps others launch liquidation Web sites
– Separate subsidiary created
• Dot-com company failures (2001)
• Sells entire Web sites, software, hardware, intellectual
property
• Temporary employment example
– Hospitals (and other companies)
– BidShift
• Sells software to employers to operate shift auctions
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• International Securities Exchange (ISE)
– New York Stock Exchange, Chicago Board of Trade
– Fully electronic options exchange
– Threatens existing physical securities exchanges
• Lower fees attract most lucrative large trades
• Existing exchanges: introducing electronic trading
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Business-to-Business Reverse
Auctions
• Examples: Owens Corning, U.S. Navy, General
Services Administration
– Acquire billions of dollars worth of materials, supplies
– Agilent, BankOne, Bechtel, Boeing, Raytheon, Sony
• Disadvantages
– Suppliers compete on price alone
• Cut corners on quality, miss delivery dates
– Replaces trusting relationships with a bidding activity
• Pits suppliers against each other (backward step)
• Advantages
– Useful for nonstrategic commodity items
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Business-to-Business Reverse
Auctions (cont’d.)
• If suppliers do not agree to participate:
– Impossible to conduct reverse auctions
• If high degree of competition among suppliers:
– Reverse auctions provides efficient way to conduct,
manage price bidding
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Auction-Related Services
• Entrepreneurs encouraged by eBay and other
auction site growth
• Provide various kinds of auction-related services
– Escrow services
– Auction directory and information services
– Auction software
• Sellers and buyers
– Auction consignment services
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Auction-Related Services (cont’d.)
• Auction escrow services
– Buyers’ common concern: seller reliability
• Buyers protect interests in high-value items
– Independent party holds payment until:
• Buyer receives item
• Buyer is satisfied item is as expected
– May take delivery of item from seller
• Perform buyer inspection (qualified to do so)
– Charge fees
• Percent of item’s cost; subject to minimum fee
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Auction-Related Services (cont’d.)
• Auction escrow services (cont’d.)
– Examples: Escrow.com, eDeposit, Square Trade
– May sell auction buyer’s insurance
• Protect buyers from nondelivery and quality risks
– Avoid escrow fraud
• Determine if licensed, bonded (licensing agency)
• Avoid offshore escrow companies entirely
– Other buyer protections
• Check seller’s rating
• Use Web site listings of unreliable sellers
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Auction-Related Services (cont’d.)
• Auction directory and information services
– Example: Auctionguide.com
• Guidance for new auction participants
• Helpful hints and tips
• Directories of online auction sites
– Example: AuctionBytes
• Publishes e-mail newsletter
• Online auction industry articles
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Auction-Related Services (cont’d.)
• Auction directory and information services (cont’d.)
– Example: PriceWatch
• Advertiser-supported site
• Advertisers post current selling prices
• Computer hardware, software, electronics
– Example: PriceSCAN
• Similar price-monitoring service
• Also includes books, movies, music, sporting goods
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Auction-Related Services (cont’d.)
• Auction software
– Target: sellers
• Helps manage online auctions
– Example: AuctionHawk and Vendio
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•
•
•
Seller management software and services
Automate tasks
Create attractive page layouts
Manage hundreds of auctions
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Auction-Related Services (cont’d.)
• Auction software (cont’d.)
– Target: buyers
• Helps manage online auctions
– Sniping software
• Observes auction progress until last second
• As auction expires: places bid high enough to win
(unless bid exceeds sniping software owner’s limit)
• Snipe: act of placing winning bid at the last second
• Almost always wins out over human bidder
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Auction-Related Services (cont’d.)
• Auction software (cont’d.)
– Example: Cricket Sniping Software site
• Created in 1997 by David Eccles
– Companies offer sniping service
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•
•
•
Sniping software runs on company Web site
Customer enters instructions on site
Company may offer subscriptions
Company may offer mixed-revenue model
– Sniping software and services business information
• AuctionBytes Web site
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Auction-Related Services (cont’d.)
• Auction consignment services
– Target: people and small businesses
• Want to use online auction
• Do not have skills, time to become a seller
– Auction consignment services
• Take item and create online auction for that item
• Handle transaction
• Remit proceeds balance (after deducting fee)
– Main auction consignment businesses
• AuctionDrop, ePowerSellers, iSold It
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Auction-Related Services (cont’d.)
• Auction consignment services (cont’d.)
– Key to success
• Convenient locations for customer drop off
• Open own stores, franchise stores
• Electronic commerce first wave
– Online auction business made possible by the Web
• Electronic commerce second wave
– Online auction business created opportunities
• For even more entirely new types of business
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Virtual Communities: Web Portals and
Social Networks
• Money-making Internet and Web approaches
– Virtual communities
– Web portals
• For on-demand Internet services:
– Three key required elements
• Cellular-satellite (mobile) communications technology
• Electronic marketplaces
• Software agents
– All exist today
• Not yet integrated
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Mobile Communications Technology
• Cellular-satellite communications technology
– Internet linking capability
• Notebook computers, personal digital assistants
(PDAs), mobile phones
• WAP
– Allows HTML-formatted Web pages to display on
small-screen devices
– Example: Palm Treo and other smart phones
• Another approach
– Possible by increased screen resolution
• Display normal Web page on the device
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Mobile Communications Technology
(cont’d.)
• Apple iPhone
– Includes touch screen controls
– Easy to view; navigate normal Web page on small
handheld device
• Web-enabled devices including other features
– Open doors to second wave of electronic commerce
– Examples:
• Global Positioning Service (GPS) receivers
• Integrating wireless Internet connectivity with GPS tools
• Technology convergence provides opportunities for
innovative businesses
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Mobile Business
• Revenue models for mobile business
– Requires interconnection
• Mobile phones
• Wireless Internet connected Notebook computers
• Online marketplaces
– People switch among access modes seamlessly
• Interconnection between mobile devices has not
occurred yet, but is close
• Example: AvantGo
– Revenue earned by selling ads
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Mobile Business (cont’d.)
• Wherify Wireless generating revenue
– Mobile technology convergence with GPS
• Sell small mobile phone with five programmable
buttons for outgoing calls
• Phone continually reports its location to Wherify
tracking center
• Subscribers obtain location information (phone call or
Internet)
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Intelligent Software Agents
• Intelligent software agents (software robots,
bots)
– Programs search the Web
– Find items for sale meeting buyer’s specifications
• Software agents focus on particular product
category
– Example: Best Book Buys
• Now developing software agents to:
– Track ratings of buyer and seller reputations
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Intelligent Software Agents (cont’d.)
• Intelligent software agent development leaders
– MIT Media Lab Software Agents Group
– Carnegie Mellon Intelligent Software Agents Lab
• BotSpot Web site
– Good source: software agents information
– Includes links to downloadable bot programs
• Simon (mySimon Web site)
– Best shopping agents currently available
• Major search engine sites have shopping agents
– Google product search page
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Virtual Communities
• Virtual community (Web community, online
community)
– Gathering place for people and businesses
• Does not have physical existence
– Various forms of Internet existence
• Usenet newsgroups, chat rooms, Web sites
– People connect and discuss common issues,
interests
– Considerable social interaction
– Relationship-forming activities
• Similar to physical communities
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Virtual Communities (cont’d)
• Virtual learning community
– Distance learning platforms (Blackboard)
– Open-source software (Moodle and uPortal)
• Web portal sites
– Allow site visitors to interact with each other
• Combine search engines, directories, free e-mail, chat
rooms, games
• Fulfill individual social interaction needs
• Help companies, customers, suppliers
– Plan, collaborate, transact business, interact
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Early Web Communities
• 1985 (predates the Web)
– WELL (“whole earth ‘lectronic link”)
• Monthly fee to participate in forums and conferences
– 1999 bought by Salon.com
• Monthly subscription fee or premium subscription
• 1995: Beverly Hills Internet virtual community site
– Offered webcams, free Web site space
– Grew into GeoCities
• Revenue: advertising, pop-up pages
• 1999: purchased by Yahoo! ($5 billion)
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Early Web Communities (cont’d.)
• 1995: Tripod virtual community
– Offered free Web page space, chat rooms, news,
weather updates, health information pages
– Revenue: sold advertising
– 1998: purchased by Lycos ($58 million)
• 1995: Theglobe.com Cornell University class project
– Included bulletin boards, chat rooms, discussion
areas, personal ads
• Added more features
– Revenue: sold advertising
– 2001: closed
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Web Community Consolidation
• Consumer virtual community success as moneymaking proposition
– Must offer something of sufficient value
• Justifies membership charge
• Example: WELL community members
– Obtain access to interesting members
• Most virtual communities unable to support
themselves
– Closed
– Sold to sites with other revenue-generating activities
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The Second Wave of Electronic
Commerce: Social Networking
• As the Internet and Web grew:
– Experiences of online communication faded
– New phenomenon in online communication began
• Internet no longer focus of community (became a tool)
• Enabled communication among community members
• Social networking sites
– New Web site category designed to facilitate
interactions among people
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The Second Wave of Electronic
Commerce: Social Networking (cont’d.)
• Friendster: Jonathan Abrams (2002)
• Facebook, LinkedIn, Tribe.net
– Tools to make new local friends, establish
acquaintances, obtain advice
• YouTube: popularized video inclusion
• MySpace: popular with younger Web users
• Basic idea
– People invited to join by existing members
– Site provides directory
• Member offers to communicate with any other member
• Intended recipient must approve contact
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The Second Wave of Electronic
Commerce: Social Networking (cont’d.)
• Web logs (Blogs)
– Web sites containing individual commentary on
current events or specific issues
– Form of social networking site
• Encourage interaction among people
• Visitors add comments
• Early blogs focused on technology topics
• 2004: blogs used as political networking tool
• 2008: all major candidates using blogs
– Communicating messages, organizing volunteers,
raising money
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The Second Wave of Electronic
Commerce: Social Networking (cont’d.)
• Retailers embracing blogs
– Bluefly.com: online discount apparel retailer
• Flypaper blog (2005)
– Ice.com: online jeweler
• Operates several blogs
• Business use
– CNN, newspapers
• Inviting information and opinion contributions
• Target 18- to 35-year-old generation
• Blogs can become businesses in themselves
– Must generate financial support (fees, advertising)
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The Second Wave of Electronic
Commerce: Social Networking (cont’d.)
• Social networking Web sites for shoppers
– Sense of community to generate revenue
– Social shopping
• Practice of bringing buyers and sellers together in a
social network to facilitate retail sales
– Example: Craigslist
• Operated by not-for-profit foundation
• All postings free (except help wanted ads)
– Example: Etsy Web site
• Marketplace for selling handmade items
• We Love Etsy: Etsy buyers, sellers share information
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The Second Wave of Electronic
Commerce: Social Networking (cont’d.)
• Idea-based social networking
– Idea-based virtual communities
• Create communities based on connections between
ideas
• More abstract, participants more engaging
– Example: del.icio.us site
• One-word bookmarks tags describe Web pages
• Focus: ideas, contributions of all community members
– Example: 43 Things
– Show promise for re-creating essence of original
Internet communities
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Revenue Models for Social Networking
Sites
• 1990
– Virtual communities, search engine sites, Web
directories selling advertising
• Generate revenue
• 1998
– Purchases and mergers occurred
– New sites still used advertising-only revenuegeneration model
• Included features offered by virtual community sites,
search engine sites, Web directories, other informationproviding and entertainment sites
– Goal: be every Web surfer’s doorway to the Web
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Revenue Models for Social Networking
Sites (cont’d.)
• Advertising-supported social networking sites
– Smaller with specialized appeal
• Draw enough visitors to generate significant advertising
revenue
– Example: I Can Has Cheezburger site
– Rough measure of stickiness
• Time each user spends at site (popularity)
• Figure 6-10 and Figure 6-11
• Social networking sites
– Members provide demographic information
• Potential for targeted marketing: very high
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Revenue Models for Social Networking
Sites (cont’d.)
• Mixed-revenue and fee-for-service social networking
sites
– Most successful Web portals: Time Warner’s AOL
• Charged fee and ran advertising
– Yahoo!: now charges for Internet phone service,
“premium” e-mail service
• Increased its revenues from non-advertising sources
– New strategy: monetizing
• Converting existing regular site visitors seeking free
information or services into fee-paying subscribers
• Backlash concerns
– Examples: The Motley Fool and TheStreet.com
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Revenue Models for Social Networking
Sites (cont’d.)
• Fee-based social networking
– 2002 to 2006: Google Answers site (fee based)
• Attempt to monetize social networking
– Similar sites: Yahoo! Answers, Amazon (Askville)
• Volunteers answer questions (no fees)
• Services generate advertising revenue
– Uclue (researchers earn 75 percent of total fee)
• Advantages: higher-quality answers, questions more
serious, better formulated
– Web sites generate revenue by providing virtual
community interaction
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Revenue Models for Social Networking
Sites (cont’d.)
• Microlending Sites
– Function as clearinghouses for microlending activity
– Microlending (became famous in 2006)
• Practice of lending very small amounts of money
• People starting or operating small businesses
(especially in developing countries)
– Microlending key element
• Working within social network of borrowers
• Provide support, element of pressure to repay
– Example: Kiva
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Revenue Models for Social Networking
Sites (cont’d.)
• Internal virtual communities
– Company-based; for employees
• Communities and opportunities for social interaction
–
–
–
–
–
–
Run on intranets
Save money with Web site (reduce paper)
Provide easy access to employee information
Good for geographically dispersed employees
Adding wireless connectivity for traveling employees
Combines second-wave technology with first-wave
business strategy
• Wireless communications with internal Web portals
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Summary
• Look at how companies using the Web to do entirely
new things
– Running auctions, creating virtual communities,
operating Web portals
• Key characteristics of seven major auction types
• Consumer online auction business dominated by
eBay (United States)
• New industries to meet needs of auction participants
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Summary (cont’d.)
• Ways sellers and buyers can protect themselves
• New approaches to making money on the Internet
and the Web
– Virtual communities and Web portals
• Social networking sites
– Emerging as important parts of electronic commerce
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