E-Business Eighth Edition Chapter 6 Online Auctions, Virtual Communities, and Web Portals

E-BusinessEighth Edition

Chapter 6Online Auctions, Virtual Communities,

and Web Portals

E-Business, Eighth Edition 22

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


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


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 – 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


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)


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• Reserve price (reserve)– Seller’s minimum acceptable price– Not announced– If not exceeded: item withdrawn (not sold)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


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


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


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)


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


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


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


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


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



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


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

• Seller may set reserve price• Bidders listed: bids not disclosed (until auction end)• Continually updated high bid amount displayed• Private auction option


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




• 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)



• 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%)


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



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


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




• 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



• 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


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


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



• 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



• 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


• 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


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


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



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


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



• 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



• 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



• 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



• Auction software– Target: sellers

• Helps manage online auctions

– Example: AuctionHawk and Vendio• Seller management software and services

• Automate tasks

• Create attractive page layouts

• Manage hundreds of auctions




• 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



• Auction software (cont’d.)– Example: Cricket Sniping Software site

• Created in 1997 by David Eccles

– Companies offer sniping service• 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




• 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



• 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


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


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



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


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


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)


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


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


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


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


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)


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


Web Community Consolidation

• Consumer virtual community success as money-making 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


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


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


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


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)


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


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


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 revenue-

generation model• Included features offered by virtual community sites,

search engine sites, Web directories, other information-providing and entertainment sites

– Goal: be every Web surfer’s doorway to the Web


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





• 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



• 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



• 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




• 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


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


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

Documents

E-Business Eighth Edition Chapter 6 Online Auctions, Virtual Communities, and Web Portals