How to Seize the Value of Online Auctions: With the Advent of 'Virtual Marketplaces', the Internet Looks Set to Become the Dominant Vehicle for Sales and Procurements. the Advantages for Bidders Are Great, but Not without Risk
van Heck, Eric, European Business Forum
As history has shown, the business landscape of the world has been changed many times due to the exploration and exploitation of alternative trade routes. When Marco Polo returned home by ship, he significantly reduced the time needed to transport silk from China to Italy. At the same time, costs were reduced and a number of merchants who had been responsible for unnecessary price increases were cut out. The same thing is happening today thanks to the internet.
The dramatic rise and fall of internet start ups and technology-related business models provides us with some interesting insights.
* There is a feverish search for new routes to the ultimate customer to reduce transaction costs, in other words bypassing is an ongoing process;
* Once a new route has been discovered first movers try to monopolise it as they want to take ownership of this new access to the customer (witness the deal announced in May 2002 between eBay and Yahoo in Europe whereby Yahoo dropped out of competition with eBay in six countries and will promote its rival instead);
* Trust (the customer's ongoing confidence that what he gets is what he expected) is vital for the acceptance of any new trade route;
* Payment and documentation to certify delivery of goods against their countervalue (monetary or otherwise) are critical to success.
More recent history shows that the internet, via such vehicles as eBay, is changing the way traditional auctions work. In the past, buyers and sellers were brought together in a physical market where the two could meet, the goods were present and business was conducted face-to-face. This remains the case, for example, at Dutch flower auctions where the goods are required to be present, even though they may be shipped back to the place of origin the same day following the auction.
But as eBay's recent expansion into Europe and its domination of the US online auction market demonstrates, the internet is rendering physical presence--whether goods or people--a moot point. And while it may not satisfy all of the customer's criteria, at this moment, its potential to become 'the modern market setting' cannot be underestimated.
Conditions for market access
Simply put, the internet's ability to render physical presence unnecessary is unparalleled and its impact will, probably, be more powerful than any development to have taken place in the past.
Now, anyone with access to the internet can gain access to 'the market', instantly, from anywhere in the world. Sophisticated postal and courier companies provide quick and economical delivery services, while traditional distribution channels and physical points of presence will lose their historical value of being 'close to the customer'.
A major advantage of online auctions is the global span of participants, meaning anyone with access to a terminal or a computer--anywhere--can participate. As multimedia facilities become more common, the internet will become a more accepted medium for electronic trade.
Other advantages include worldwide pricing availability, and a reduction in transaction costs because no physical presence is required, which in turn reduces selling costs, administration costs and transportation costs, or in the case of the Dutch flower auction example by not having to send back the flowers to the origination point.
There are, however, disadvantages as well. Information, ironically, tends to become less important as more participants can share the same information. Information 'asymmetry' between buyers and sellers is reduced, thus rendering the information less valuable.
In terms of price, there are capacity trade-offs. Prices will depend upon actual production capacity so under-utilisation will be evident sooner and shortages will drive up prices faster. Finally, in terms of reducing switching costs, it will be easier for buyers to take their business elsewhere, simply by clicking a computer mouse. …