An online auction (also electronic auction, e-auction, virtual auction, or eAuction) is an

auction An auction is usually a process of buying and selling goods or services by offering them up for bids, taking bids, and then selling the item to the highest bidder or buying the item from the lowest bidder. Some exceptions to this definition e ...

held over the

internet The Internet (or internet) is the global system of interconnected computer networks that uses the Internet protocol suite (TCP/IP) to communicate between networks and devices. It is a '' network of networks'' that consists of private, p ...

and accessed by internet connected devices. Similar to in-person auctions, online auctions come in a variety of types, with different bidding and selling rules. In 2002, online auctions were projected to account for 30% of all

e-commerce E-commerce (electronic commerce) is the activity of electronically buying or selling of products on online services or over the Internet. E-commerce draws on technologies such as mobile commerce, electronic funds transfer, supply chain manag ...

, indicating large growth for the sector. There are three primary markets for online auctions: business to business (B2B), business to consumer (B2C), and consumer to consumer (C2C). The largest consumer-to-consumer online auction site is

eBay eBay Inc. ( ) is an American multinational e-commerce company based in San Jose, California, that facilitates consumer-to-consumer and business-to-consumer sales through its website. eBay was founded by Pierre Omidyar in 1995 and became ...

, which is growing in popularity because it is a convenient, efficient, and effective method for buying and selling goods. Despite the benefits of online auctions, the anonymity of the internet, the large market, and the ease of access makes auction fraud easier online than in traditional auctions. , online auction fraud was the most common type of

internet fraud Internet fraud is a type of cybercrime fraud or deception which makes use of the Internet and could involve hiding of information or providing incorrect information for the purpose of tricking victims out of money, property, and inheritance. In ...

History

Online auctions originated on web forums as early as 1979 on

CompuServe CompuServe (CompuServe Information Service, also known by its initialism CIS) was an American online service provider, the first major commercial one in the world – described in 1994 as "the oldest of the Big Three information services (the oth ...

and The Source, as well as through email and

Bulletin board system A bulletin board system (BBS), also called computer bulletin board service (CBBS), is a computer server running software that allows users to connect to the system using a terminal program. Once logged in, the user can perform functions such ...

s. Auctioneers and sellers would post notices describing items for sale, minimum bids, and closing times. As the popularity of online auctions grew, websites dedicated to the practice began to appear in 1995 when two auction sites were founded. The first online auction site was Onsale.com, founded by Jerry Kaplan in May 1995. Onsale's business model had the company act as the seller. In September of 1995,

was founded by French-Iranian computer scientist

Pierre Omidyar Pierre Morad Omidyar (born Parviz Morad Omidyar, June 21, 1967) is a French-born Iranian-American billionaire. A technology entrepreneur, software engineer, and philanthropist, he is the founder of eBay, where he served as chairman from 199 ...

using a different approach to online auctions by facilitating person-to-person transactions which was a popular choice with consumers, leading

to become the largest e-commerce site in the early 2000s.

Benefits of Online Auctions

A core benefit of an online auction is the removal of the physical limitations of a traditional auction that requires attendees to be geographically located together which greatly reduces audience reach. Online auctions offer advantages to users that traditional auction formats do not offer such as the use of automated bids, using search engines to find items, and the ability for users to view items by categories. Along with these benefits, online auctions have greatly increased the variety of goods and services that can be bought and sold in an auction format.

Types

English auctions

English auctions are also known as open outcry or raise prices. Their origins can be traced back to the end of the second century. The ancient Roman heralds announced to the world and were responsible for auctioning some court items and selling them to the highest bidder. In live terms, English auctions are where bids are announced by either an auctioneer or by the bidders, and winners pay what they bid to receive the object. English auctions are the most common third-party online auction format and are known for their simplicity. English auctions are an ascending open bid where attendees are aware of the other bids with the winner being the highest bidder. The popularity of the English auction is due to the fact that it uses a mechanism that people find familiar and intuitive, which therefore reduces transaction costs. Additionally, the English auction format is popular due to its ease-of-use in an online environment.

Dutch auctions

In a Dutch auction, the item is initially auctioned for the highest price. This price is gradually reduced over time until a bid is received, thereby reserving the auctioned item for the bidder at the current price. Bidders must balance certainty with the price of the item. Bidding early can secure the item, but it is easy to pay a premium for it. Bidding later at a lower price may lose out to another bidder.

First-price sealed-bid

First-price sealed-bid auctions are when a single bid is made by all bidding parties and the single-highest bidder wins and pays what they bid. The main difference between this and

English auctions An English auction is an open-outcry ascending dynamic auction. It proceeds as follows. * The auctioneer opens the auction by announcing a suggested opening bid, a starting price or reserve for the item on sale. * Then the auctioneer accepts incr ...

is that bids are not openly viewable or announced, as opposed to the competitive nature which is generated by public bids. From the game-theoretic point of view, the first-price sealed-bid auction is strategically equivalent to the

Dutch auction A Dutch auction is one of several similar types of auctions for buying or selling goods. Most commonly, it means an auction in which the auctioneer begins with a high asking price in the case of selling, and lowers it until some participant acc ...

; that is, in both auctions the players will be using the same bidding strategies.

Vickrey auction

The Vickrey auction, also known as the stamp collector's auction or the second sealed auction, uses a similar principle to a first-price sealed-bid auction. However, the highest bidder only pays the price of the second highest bid. The Vickrey auction is intended to prevent the incentive for buyers to bid strategically, due to the fact it requires them to speak the truth by giving their true value of the item. If a bidder makes a very high bid, they may have to pay that price, but if they make a low bid there is a chance that they will lose the item. Therefore, the winner is the person who values the item the highest. It's a win-win situation for both the seller and the winner. Vickrey auctions, however, are not suitable for all auctions since perishable items such as seafood and flowers must be sold in time.

Reverse auction

Reverse auction A reverse auction (also known as buyer-determined auction or procurement auction) is a type of auction in which the traditional roles of buyer and seller are reversed. Thus, there is one buyer and many potential sellers. In an ordinary auction al ...

s are where the roles of buyer and seller are reversed. Multiple sellers compete to obtain the buyer's business, and prices typically decrease over time as new offers are made. They do not follow the typical auction format in that the buyer can see all the offers and may choose which they would prefer. Reverse auctions are used predominantly in a business context for

procurement Procurement is the method of discovering and agreeing to terms and purchasing goods, services, or other works from an external source, often with the use of a tendering or competitive bidding process. When a government agency buys goods or s ...

. Reverse auctions bring buyers and sellers together in a transparent marketplace. The practice has even been implemented for private jet travel on the online auction site

Marmalade Skies Marmalade Skies is an online auction site that offers flyers a chance to bid on empty leg flights and make flight requests for on-demand private jet travel. The company also sells seats on scheduled Part-135 qualified piston and Turboprop aircraf ...

. The term reverse auction is often confused with

unique bid auction A unique bid auction is a type of strategy game related to traditional auctions where the winner is usually the individual with the ''lowest'' unique bid, although less commonly the auction rules may specify that the ''highest'' unique bid is the ...

s which are more akin to traditional auctions, as there is only one seller and multiple buyers. However, they follow a similar price reduction concept except the lowest unique bid always wins and each bid is confidential.

Bidding fee auction

bidding fee auction A bidding fee auction, also called a penny auction, is a type of all-pay auction in which all participants must pay a non-refundable fee to place each small incremental bid. The auction is extended each time a new bid is placed, typically by 10 to 2 ...

(also known as a penny auction) requires customers to pay for bids, which they can increment an auction price one unit of currency at a time. On English auctions for example, the price goes up in 1 pence (0.01 GBP) increments. There has been criticism that compares this type of auction to gambling, as users can spend a considerable amount of money without receiving anything in return (other than the spent bids trying to acquire the item). The auction owner (typically the owner of the website) makes money in two ways: the purchasing of bids, and the actual amount made from the final cost of the item.

Legalities

Shill bidding

Shill bidding is the most prominent type of online auction fraud where sellers submit bids to increase the price of an item without intending to win. Shill bidding is also one of the most difficult types of fraud to detect, since it is usually conducted by the seller of the auction in collusion with one or more bidders in the auction. Alternatively, the seller may create multiple shill bids on the account they used to submit the bogus bid. Therefore, a detection mechanism is proposed at the end of the auction. However, if Shill fails to detect bidders during the auction, innocent bidders may fall for it at the end of the auction. In 2011, a member of

became the first individual to be convicted of shill bidding on an auction. By taking part in the process, an individual is breaking the European Union fair trading rules which carries out a fine of up to £5,000 in the

United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and ...

Shield bidding

Shield bidding is a technique involving a buyer using another account (called a "shield") to discourage other competitors from bidding by artificially increasing the price and then at the last moment withdrawing their bid to allow the actual buyer to win the auction with a lower price. Most online auction sites don't allow withdrawing bids, therefore making this technique impossible to perform. This technique can still be taken advantage of on sites where this rule is not implemented.

Spotting Shills and Shields

It is difficult to spot a dirty technique being used by an anonymous or pseudonymous person in online auctions, but it is certainly doable. It can be revealed by examining a seller’s auction history and looking for an account which has bid on every or almost every auction of that seller. If there is someone who meets those characteristics, it is most likely a shill using that account to increase the price. A shield can be spotted similarly to a shill. By doing a search of a person's won auctions, it can be found out whether or not there is another account participating in the same auctions without ever winning anything. If there is, it is possible that the person is using a shield to help them become successful in auctions.

Fraud

The increasing popularity of using online auctions has led to an increase in fraudulent activity. This is usually performed on an auction website by creating a very appetizing auction, such as a low starting amount. Once a buyer wins an auction and pays for it, the fraudulent seller will either not pursue with the delivery, or send a less valuable version of the purchased item (replicated, used, refurbished, etc.). Protection to prevent such acts has become readily available, most notably PayPal's buyer protection policy. As

PayPal PayPal Holdings, Inc. is an American multinational financial technology company operating an online payments system in the majority of countries that support online money transfers, and serves as an electronic alternative to traditional paper ...

handles the transaction, they have the ability to hold funds until a conclusion is drawn whereby the victim can be compensated.

Sale of stolen goods

Online auction websites are used by thieves or

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to sell stolen goods to unsuspecting buyers. According to police statistics, there were over 8000 crimes involving stolen goods, fraud, or deception reported on eBay in 2009. It has become common practice for organized criminals to steal in-demand items, often in bulk. These items are then sold online, as it is a safer option due to the anonymity and worldwide market it provides. Auction fraud makes up a large percentage of complaints received by the FBI’s Internet Crime Complaint Center (around 63% in 2005 and 45% in 2006).

References

External links

* {{Authority control American inventions French inventions