Chapter 1

1 From Babylon to Second Life: A Brief History of Online Auctions

Auctions can be traced back to 500BC, when Babylonian women of marriageable age would be sold to the most generous bidder.1 Although the ‘goods’ nowadays available for sale no longer include women,2 the popularity of the auction process as a method of sale has grown steadily across the centuries. Auctions adapted to technology and became one of the most popular ways of buying and selling on the internet in the twentieth century.

Despite some Babylonian roots, it is the Roman auction that is mostly credited as the precursor of auctions in the UK as well as in many other European countries. Etymologically, many Member States derive their terminology from Latin. For example, the term ‘auction’ in English,3 ‘aukcja’ in Polish or ‘Auktion’ in German finds roots in the words augere and auctum, which mean ‘to increase’.4 Similarly, the Spanish term ‘subasta’ or the Italian ‘asta’ derive from another Latin expression which was used when Roman soldiers auctioned their loot: sub hasta (‘under the spear’).5 In Roman times, auctionatores6 were charged with the organisation and the running of sales, a process ‘familiar to present-day auction-goers’7 attending sales organised by auctioneers such as Christie’s or Sotheby’s.8 For many years, the auction was reserved to a handful of specialist people present in the traditional auction rooms. The use of the internet as a vehicle to organise auctions has brought the auction process within the grasp of the general public. The verb ‘to eBay’ entered the Collins dictionary in June 2005,9 10 years after eBay first offered strangers10 the ability to buy and sell worldwide at minimum cost. The site has grown to epitomise the success of electronic commerce.11 Many websites followed in eBay’s footsteps, setting up platforms enabling consumers, small and medium-sized enterprises (SMEs) and big multinationals alike, to sell online using bidding procedures.12 In fact, a large number of variations on the eBay model have now emerged, including penny auctions and TV auctions. The spread of auctions does not stop here, and is likely to continue and evolve with technology and consumer buying habits. Mobile applications enabling users to participate in auctions on the move from their smartphones are now available, and virtual auctions are the primary mode of property exchange and sale in virtual environments such as Second Life.13

2 Typology of Online Auction Platforms

Familiarity with the typology of online auction platforms is therefore essential, not least because it underpins the findings of empirical surveys of online auction platforms conducted for this book, but also because online auctions are run using a wide variety of business models. Since its inception in the mid-1990s, the online auction sector has been fast-moving and has forced players to continue to expand, diversify and innovate in order to attract users and retain market shares.14 Many players have been and gone but new ones join the marketplace every day, bringing with them new business models and ways to engage consumers. Online auctions can be defined by reference to a number of elements: the role of the platform; the fee model adopted and the auction sale technique used.

2.1 Role of the Online Auction Platform: Proprietary v Intermediary Platforms

The market is organised along the divide between online auctions organised by intermediaries or by principals/proprietors. Those models, essentially, can be organised along economic theories of one-sided and two-sided electronic commerce platforms.15

A number of platforms are operating on a one-sided economic model. They are acting as principals. They have sourced the products from suppliers and acquired ownership before reselling them online, using an auction process. They are proprietors of the goods put up for sale as well as the site that they operate. In this book, I refer to them as proprietary platforms.

By contrast, many platforms, including eBay, have adopted a two-sided model where the platform acts as an intermediary. On those platforms, it is possible for consumers to sell their unwanted Christmas presents, in the same way that a multinational corporation can also sell products. It is therefore a platform that can be equally used by consumers and businesses of all sizes to sell goods they either own or on behalf of another party. Those platforms are two-sided because the platforms act as intermediaries between sellers and buyers. Buyers and sellers are using the platform as a means to find each other. For example, eBay provides many tools to enable contractual relationships to be formed, but it does not play direct a role in the conclusion of the contract between buyer and seller. This role has important consequences on the legal classification of online auctions but also on the liability that can be imposed on the intermediary. The role played by the platform therefore impacts the kind of protection consumers can benefit from. Those issues are explored in more detail in Chapters 2 and 7.

2.2 Fee Model Adopted by Online Auction Platforms

Different types of business models coexist, using a variety of selling techniques to match offer to demand and determine a price. The way the platform earns its revenue also varies widely.16 Some accrue revenues through the sale of third party advertisement and allow buyers and sellers to use the platform freely.17 However, in exchange for free listing, consumers have to accept that adverts be brought to their attention while visiting the site. The fee models most used are twofold: pay-to-sell or pay-to-buy.

2.2.1 Pay-to-sell

This is the model employed by intermediary platforms. As the name indicates, it is the seller who pays the fees associated with a sale in this model. Although it does not exclude buyers also paying a fee, the sector-wide practice is to only operate a one-sided fee model. Buyers do not have to pay to buy. Under this model, because it is free for buyers to browse and purchase, sellers are hoping to attract a wider audience and thus raise higher prices for the goods auctioned. Sellers are supporting the cost of transacting by agreeing to pay a series of fees.

Initially a listing fee is payable on most sites. Listing fees vary depending on the starting bid amount or the fixed price amount the seller elects to use. In principle, the higher the starting price is, the higher the fee. Similarly, extra fees for additional features can be added and vary depending on the perceived value of the feature. Many features exist. For example, sellers can choose a listing upgrade which offers a more prominent place for the listing on the site, an item subtitle or the possibility to schedule in advance the start of an auction at a particular time and day to enhance visibility. When available, another fee can accrue for sellers who wish to combine auction and fixed-priced formats. Sellers can also pay additional fees to gain international site visibility or, on some sites, to introduce a reserve price for auctions. Finally, another fee often observed is based on the final value of the item, once it is sold. If an item does not sell, the final value fee is not owed, but all other fees are acquired by the platform.

Some sites also offer the ability to host shops on the intermediary platform. Those normally require the payment of a monthly subscription. Other sites have also adopted a pay-to-sell model, but charge a monthly, yearly or even lifetime subscription to sell as many items as desired in any given period. The subscription varies in length and price but offers gratuity of listing fees and final valuation fees that are applicable in the absence of such subscription. The business model is based on ensuring high levels of items up for sale, to attract many buyers and ensure seller retention, since to use another site they would have to pay fees.18

2.2.2 Pay-to-buy

The pay-to-buy model is the industry standard for sites acting as principals. Understandably, where pay-to-sell sites can generate extensive revenues because third parties use the site to sell their goods and services, principals have to shoulder the cost of putting items up for sale themselves. Thus, it is only the buyers that can help generate revenues, through the price paid for items and increasingly through a variety of other charges.

Some TV auctions use premium phone lines to register bids and make money from consumers calling to buy the items as well as from the cost of the item auctioned. TV auctions however also operate online and, when it is the case, consumers can bid online at no cost.

On penny auction sites, bidders have to pay to place a bid online. The bidders pay for each bid placed and the site generates revenues not from the sale of the item per se, but from the placing of bids. Those sites are called penny auctions because bids only go up (or down) by increments of one penny at a time. If an item retails for £500 and it is snapped up for £9.97 at the auction, the website, considering it charges £1 per bid, will pocket £997 from the placing of bids alone. It will also accrue the final price of the auction (£9.97) paid by the best bidder on the auction. Unsuccessful bidders are left out of pocket, but can use the amount already spent on bidding to be deducted from fixed-price sales on a similar item, after the auction has ended.

2.3 Sale Method Used by the Platform

Platforms use a variety of methods to sell goods and services. Auctions are the primary focus, but they are often used alongside fixed-price sales. Auction techniques used to sell are also heterogeneous..

2.3.1 Auctions v fixed prices

Online retail essentially is based on a fixed-price model. Sites such as Amazon or PriceMinister (in France) only use this model. Online auction sites differ in the sense that they offer at least a mixture of fixed prices and auctions. This mix of sale formats is a key characteristic on eBay, although it has not always been in operation. Reportedly, Yahoo! Auctions became the first online auction site to launch the use of the fixed-price mechanism in 199919 and eBay only adopted this model in 2000. Nevertheless, fixed price sales and auctions have now become a hallmark on intermediary platforms. They are also increasingly used on proprietary platforms. For example, on penny auction sites it is possible to buy using a fixed price model. The price gets calculated after the auction ends. A rebate on the fixed price is offered based on the amount that was bid at auction.20 On eBay, all sales can be organised using auctions and fixed price, and both methods can be used together. When it is the case, the auction runs parallel to the fixed price sale and any buyer selecting the ‘buy-it-now’ function (as it is called on eBay) would automatically close the auction. However, the buy-it-now function is only available in parallel until someone starts bidding or reaches the set reserve price. As soon as bidding starts or the reserve price is met, the buy-it-now function disappears.21

2.3.2 Online auction types

Many types of auctions are used.22

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