Online auctions are one of the most popular and effective ways of trading goods over the Internet (Bapna, Goes, & Gupta, 2001). Thousands of items are sold on online auctions everyday including books, toys, computers, antiques, and even services. As an example, eBay (http://www.ebay. com), the largest online auction house, has more than 241 million registered users today, and in the year 2006 alone, eBay recorded consolidated net revenue of $6 billion (eBay, 2007). On any given day, there are more than 78 million items listed on eBay, and approximately 6 million listings are added per day. It has also spread its wings to other countries outside the USA, and to date it is present in 24 countries. In addition to eBay, there are more than 2,600 auction houses that conduct online auctions (common sites include Amazon. com, http://www.amazon.com; Yahoo! Auctions, http://auctions. shopping.yahoo.com; priceline.com, http://www.priceline. com; and uBid, http://www.ubid.com). These auction houses conduct many different types of auctions according to a variety of rules and protocols.
An auction is defined as a bidding mechanism described by a set of auction rules that specify how the winner is determined and how much he or she has to pay (Wolfstetter 2002). Auctions are widely used in many transactions including the sale of arts, wine, fresh products, diamonds, and real estate. In fact, auctions are not new. They were used to allocate scarce resources in Babylon from about 500 B.C. (Shubik, 1983). During those times, an annual Babylon marriage market was conducted where men had to bid for their prospective wives. The richest Babylonians who wished to wed had to bid against each other for the loveliest maiden, while the poorer ones had to settle for the less beautiful ones. Moreover, in ancient Rome, auctions were used in commercial trade to liquidate property and to sell surplus spoils of war on the battlefield (including plundered booty). Since then, auctions have flourished in many other civilizations, but they became more prominent in the 17th century where they were used to liquidate goods and to sell unsalable goods (such as domestic animals, tobaccos, natural resources, horses, and slaves) at the end of the season.
The practice of auctioning goods has been popular throughout the years because auctions are an extremely effective way of allocating resources to the individuals who value them most highly (Reynolds, 1996). This effectiveness means that very many variants have been produced (Wurman, Wellman, & Walsh, 2001); however, there are four main types of single-sided auctions that are commonly and traditionally held (Klemperer, 1999):
the ascending-bid auction (also called the open, oral, or English auction),
the descending-bid auction (also called Dutch auction),
the first-price sealed-bid auction, and
the second-price sealed bid auction (also called Vickrey auction).
Key Terms in this Chapter
English Auction: It is an auction in which the auctioneer starts the auction with a low price that is then successively raised until one bidder remains.
Reservation Price: This is the maximum price the bidder is willing to pay for the item being auctioned.
Software Agents: These are software capable of making decisions on behalf of the user and are usually endowed with some level of autonomy and intelligence.
Reverse Auction: It is an auction where the bidder is the seller and not the buyer. The buyer will indicate the requirements and sellers will submit bids.
Online Auction: it is an Internet-based version of a traditional auction in which there is no time and location constraints.
Auction: It is a mechanism described by a set of auction rules that specify how the winner is determined and how much he or she has to pay.
Bid: It is the price offered by a given buyer in an auction at a given time while the auction is on going.
Bid Sniping: This occurs when bids are placed just a few minutes or seconds before an auction ends. This type of bidding is applicable in English auctions that have fixed deadlines (such as the ones conducted in eBay).
Shill Bidding: This occurs when a seller bids in his or her own auction in an effort to increase the price other bidders need to pay to win the auction.
Dutch Auction: It is an auction in which the auctioneer starts at a very high price that is then progressively lowered until there is a call from any bidder to claim the item.