March 12th, 2004
Buyers and sellers have been using auctions for decades. Buyers can receive
discounts on products if no other bidders are interested, and sellers have the opportunity
to sell items for a higher price than they would normally get without bidding. Over the
past few years’ auctions, like many other things, have moved to the Internet. This paper
will look at the format of Internet auctions, the advantages and disadvantages for buyers
and sellers, and how items on Internet auctions can be over priced.
Internet auctions are usually set up in one of two formats. The first is where
consumers are buying and selling items from one another. An example of this would be
www.ebay.com, where consumers from all over the world buy and sell many items to one
another. The second format is where an Internet company sets up a warehouse with new,
used, and remanufactured goods to auction off to consumers. An example of this would
be www.ubid.com. There is also a third format of Internet auctions that are run by the
government. On these auctions you can purchase repossessed vehicles, mortgaged homes,
and other items taken by the government. An example of this would be
When looking at the first two types of Internet auctions the process of bidding on
an item is basically the same. The customer must sign up with the website in order for the
site to have all the proper mailing and billing information. Once signed up, the customer
is given a username and password that they use to sign into the site with in the future.
After all the information is entered, the customer may begin bidding on any item they
chose. There is no fee associated with using these sites, a customer may bid and browse
as much as they like without paying a dime. The difference between these sites and the
government auction sites is the fact that you do not have to pay an annual fee with these
sites. When you are using the sites like www.governmentauctions.com there are annual
fees, for example, paying $39 per year to bid or browse on these sites.
There are many advantages to using Internet auctions for both buyers and sellers.
The first advantage that benefits both buyers and sellers is price. Sellers of products have
the ability to find customers who value the product the most. In doing this they would be
able to get a price for their product that they may not be able to get in their home market.
On the flip side, sellers can put in low bids for products and, if demand is low enough for
the product, they can get it at a lower price than they would normally have to pay. Even
though this price is lower for the consumer, it still may be a premium for the seller.
Another benefit of these auctions that ties in closely to price advantages is the size of the
market. Literally anyone in the world can access these sites to buy and sell their items.
Where all products are shipped back and forth, distance is not an issue. In fact in an
article in The Economist one author stated, “The Internet’s chief advantage for
auctioneers is the size of its audience. Its global reach brings a critical mass of buyers and
sellers to the most popular auction sites, avoiding the problem of insufficient trading that
bedevils many of their cousins in the physical world” (Going, Going...).
Some other advantages of the sites come from the auction companies. To
increase security and reduce bad debts there is a rating system for both buyers and sellers
so others can see if they have defaulted on product delivery, or payment before. There is
also a feature on some sites called PayPal, which facilitates in the transfer of money so
sellers are more confident they will receive payment. Some other advantageous features
of Internet auctions include bid starting points and buy-out options. Sellers can set a
starting point for bidders so they don’t receive a final sale price that is much lower than
what they would be willing to take for the product. There is also a buy-out option. With
this option sellers can set a price for the product for someone to buy it out right rather
than the price being determined by demand forces.
After looking at all the advantages of an Internet auction, one may wonder why
anyone would ever hold a non-internet auction again. Unfortunately, there are also
disadvantages to Internet auctions. The major disadvantage is fraud. According to the
Internet Fraud Complaint Center with the FBI and the National White Collar Crime
Center, they receive “more complaints about online fraud than anything else”
(Goldsborough). Many types of fraud occur regularly when dealing with Internet
auctions. Inaccurate product descriptions are common. In an article by Reid
Goldsborough, he tells a story about winning a coin. “I discovered after receiving it [a
1799 silver dollar] that it had a plug in it, a result of someone in the past drilling a hole to
make jewelry and someone later filling that hole with a silver plug” (Goldsborough).
Many of these product descriptions can differ just because they are subjective, but there
are enough fraudulent cases that it cannot be ignored.
Another form of fraud is late shipments or even no shipment. Some sellers either
decide after the sale to not send the item or never had plans of actually sending out the
item that was bought. A third form of fraud is termed bid siphoning. This is where a
person lures a bidder off of the legit auction site saying that they can auction off the same
item cheaper. Then, when the bidder is off the site, the warranties and insurance cannot
cover them and the buyer is tricked into sending the money without receiving anything in
return. There is also shill bidding. This is when a fake bidder bids just to drive up the
price. Similar to this is bid shielding. Bid shielding is when a fake buyer make a very
high bid so others do not bid then drops their high bid. Then a person that they know can
buy the item for a low price (Federal Trade Commission).
A final way of committing fraud with Internet auctions is to pose as escrow
services. In this type of fraudulent scheme, a fake seller tells the buyer to use a certain
service. Then when the buyer supplies their payment information, the seller disappears
and the buyer can never get their money back (Federal Trade Commission).
There are actions a person can take if they are considering trying their hand at an
Internet auction. At the Federal Trade Commission’s website, helpful hints are given for
new buyers and sellers. Their tips for the buyers include:
Become familiar with the auction site
Find out what protection the site offers
Know exactly what you are bidding on
Find out about the seller
Find out who pays shipping
Check on the return policy
Save all transaction information
Protect your privacy
Check out any escrow the seller insists on using
Check with the Better Business Bureau
The Federal Trade Commission continues with tips for sellers. These tips cover knowing
your legal obligations, hints on how to accurately advertise your product, how to deal
with bidders, and arranging for payment. They follow up with contact information for
anyone who has problems with fraud in any of these situations (Federal Trade
Commission). There are also forms of insurance that a person can buy for Internet
auctions. One type is called Bidsafe and can be purchased from Auction Universe
Another disadvantage of having an Internet auction is the lack of personal contact.
Many small towns use auctions as an excuse to all get together. It is an all day event
where everyone hangs out, eats food, and buys items they may not even need. Along
with being there to socialize, a person gets a chance to inspect the items in person.
Today, a person was overheard speaking about someone trying to have a farm equipment
auction online. He stated that no one would buy a machine costing a few thousand
dollars without looking at it first. This seems to make sense that a person would want to
see the item and not just take the seller’s word for it being “like new.”
In conclusion, there are three main types of Internet auctions, which cater to
different kinds of consumers to meet their needs. All of these sites have many wonderful
advantages and are well worth using. There are also some disadvantages to these sites
that consumers have to be careful of. The main one being fraud. Sellers and consumer
need to make sure they have all the information about different aspects of these sites to
make sure they protect themselves.
Going, Going…Richer. Business Week. Dec 13, 1999 i3658 pEB16.
Goldsborough, Reid. Internet Auctions Examined. Link-Up. Nov 2000 v17 i6 p24.
Increasing Market for Online Auctions. Computer Weekly. Nov 19 1998 p56.
Internet Auctions: A Guide for Buyers and Sellers. Federal Trade Commission.