Internet Auctions - Competition on the German Market and the Advantage of Auctioning Rare Goods-

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