The Study Hall College

Affiliated to University of Lucknow

BBA VI Sem
E-Commerce
UNIT – II

E-Commerce: A Consumer Oriented

Approach
E-commerce, or electronic commerce, is the buying and selling of products or services over the
internet. As with any business, the success of an e-commerce venture ultimately depends on the
satisfaction of its customers. Therefore, taking a consumer-oriented approach is crucial for the
success of an e-commerce business.

Ways to approach e-commerce from a consumer-oriented perspective:

1. User-friendly website: The website should be designed with the customer in mind, with
a clear and easy-to-use interface. Navigation should be simple and intuitive, and the
website should be optimized for different devices.
2. Product information: Customers should be able to find all the information they need
about the products or services on offer, including detailed descriptions, specifications,
and pricing.
3. Personalization: E-commerce businesses can use data and analytics to personalize the
shopping experience for each customer. For example, by recommending products based
on their past purchases or browsing history.
4. Customer service: Providing excellent customer service is essential for building trust
and loyalty with customers. E-commerce businesses should provide multiple channels for
customer support, such as email, phone, or live chat.
5. Secure payment options: Customers need to feel secure when making purchases online.
E-commerce businesses should offer secure payment options, such as PayPal or credit
card payments with SSL encryption.
6. Fast and reliable shipping: Customers expect fast and reliable shipping, with real-time
tracking information. E-commerce businesses should have a robust shipping
infrastructure in place, with options for expedited shipping if necessary.
7. Returns and refunds: Customers should have a clear understanding of the return policy,
including how to initiate returns and how refunds will be processed. E-commerce
businesses should make the process as easy and transparent as possible.

Adopting a consumer-oriented approach in e-commerce can benefit businesses in several

ways:
 1. Increased customer satisfaction: By prioritizing the needs and preferences of
customers, businesses can provide a better shopping experience, leading to increased
customer satisfaction.
2. Improved brand reputation: Providing excellent customer service and a seamless
shopping experience can help build a positive reputation for the business, leading to
increased customer loyalty and word-of-mouth referrals.
3. Higher conversion rates: A user-friendly website, personalized recommendations, and
secure payment options can increase the likelihood of customers completing their
purchases, leading to higher conversion rates and increased revenue.
4. Reduced cart abandonment: By addressing customer concerns and offering clear return
policies, businesses can reduce the number of abandoned carts, leading to increased sales.
5. Competitive advantage: In today’s competitive e-commerce landscape, adopting a
consumer-oriented approach can help businesses stand out from their competitors and
attract and retain more customers.

Traditional Retailing v/s E-Retailing

Traditional Retailing

Traditional retailing refers to the practice of selling products or services through physical stores,
such as department stores, specialty shops, and boutiques. It is a long-established method of
commerce that has been around for centuries.

In traditional retailing, customers visit a physical store to browse, try on, or examine products
before making a purchase. Retailers stock their stores with inventory based on their target
audience and demographic, and employ sales associates to assist customers with their shopping
experience. This approach allows customers to have a more personalized and interactive
experience with the products and the staff.

Traditional retailing has several advantages, including:

1. Personalized customer service: Customers can receive personalized assistance from sales
associates, who can provide recommendations, answer questions, and address concerns.
2. Tangible experience: Customers can see, touch, and try on products before making a purchase,
allowing them to make a more informed decision.
3. Social experience: Shopping in physical stores can be a social experience, allowing customers to
shop with friends or family and enjoy the atmosphere of the store.
4. Immediate gratification: Customers can take the products home with them immediately, rather
than having to wait for shipping.
5. Brand recognition: Physical stores can help build brand recognition and loyalty through visual
merchandising and customer service.

However, traditional retailing also has some disadvantages, such as:

1. Limited geographic reach: Physical stores are limited to their local customer base and may not
be accessible to customers in other locations.
 2. Limited operating hours: Physical stores have fixed operating hours, which may not be
convenient for all customers.
3. Higher overhead costs: Physical stores require high overhead costs, such as rent, utilities, and
staffing.
4. Limited product range: Physical stores have limited space for inventory and product display,
which may restrict the range of products available for customers.
5. Competition from e-retailers: With the rise of e-commerce, traditional retailers face increasing
competition from online retailers, who offer convenience and accessibility to customers.

E-Retailing

E-retailing, also known as online retailing or e-commerce, refers to the practice of selling
products or services through digital channels, such as websites, mobile apps, social media
platforms, or marketplaces. It is a rapidly growing method of commerce that has revolutionized
the way people shop.

In e-retailing, customers can browse, select, and purchase products or services online using a
computer or mobile device. E-retailers typically maintain an online store where customers can
view product information, images, and reviews, and make a purchase using a secure payment
system. E-retailers can also leverage technology to offer personalized recommendations,
optimize the shopping experience, and provide fast and reliable shipping.

E-retailing has several advantages, including:

1. Convenience and accessibility: Customers can shop from anywhere and at any time, making it
more convenient and accessible for busy or remote customers.
2. Wide range of products and brands: E-retailers can offer a wider range of products and brands
than physical stores, as they are not limited by physical space.
3. Price comparison: E-retailers can offer price comparison options, allowing customers to easily
compare prices across different products and retailers.
4. Lower overhead costs: E-retailing requires lower overhead costs than traditional retailing, as
there is no need for physical stores or high staffing levels.
5. Global reach: E-retailers can reach a global customer base, allowing businesses to expand their
reach beyond their local area.

e-retailing also has some disadvantages, such as:

1. Lack of tangible experience: Customers cannot touch, try on, or examine products before
making a purchase, which may lead to uncertainty or dissatisfaction.
2. Delayed gratification: Customers have to wait for shipping or delivery, which may take longer
than the immediate gratification of buying in-store.
3. Potential for fraud: E-retailing is susceptible to fraud and security breaches, as sensitive
information such as credit card details may be vulnerable to theft.
4. Competition from other e-retailers: With the rise of e-commerce, the competition between e-
retailers has intensified, making it challenging for businesses to differentiate themselves.
5. Technical issues: E-retailing relies heavily on technology, which can lead to technical issues such
as website crashes or payment processing errors.
Traditional Retailing v/s E-Retailing

Traditional retailing and e-retailing are two different approaches to selling products to
consumers, each with its own strengths and limitations.

Traditional retailing involves physical stores where customers can visit, browse, and purchase
products. It allows customers to see, touch, and try on products before making a purchase, which
can be a significant advantage, especially for items such as clothing, footwear, and furniture.
Traditional retailing also offers the opportunity for personalized customer service, which can
help build customer loyalty and trust.

On the other hand, e-retailing, or online retailing, involves selling products through digital
channels such as e-commerce websites, social media platforms, or mobile apps. It offers
convenience and accessibility, allowing customers to shop from anywhere and at any time. E-
retailing also provides a wider range of products and price comparison options, making it easier
for customers to find the best deals.

Here are some key differences between traditional retailing and e-retailing:

1. Physical presence: Traditional retailing requires a physical store presence, while e-retailing can
be done entirely online.
2. Overhead costs: Traditional retailing involves high overhead costs, such as rent, utilities, and
staffing, while e-retailing requires fewer overhead costs.
3. Customer experience: Traditional retailing offers a more personal and interactive customer
experience, while e-retailing provides convenience and accessibility.
4. Product range: E-retailing offers a wider range of products and brands, while traditional retailing
has limited space for inventory and product display.
5. Geographic reach: E-retailing allows businesses to reach a global customer base, while
traditional retailing is limited to the local customer base.

Comparison Traditional Retailing E-Retailing

Physical Presence Requires a physical store presence Can be done entirely online

Involves high overhead costs, such as rent,

Overhead Costs Requires fewer overhead costs
utilities, and staffing

Customer Offers a more personal and interactive

Provides convenience and accessibility
Experience customer experience

Has limited space for inventory and product Offers a wider range of products and
Product Range
display brands

Allows businesses to reach a global

Geographic Reach Is limited to the local customer base
customer base
Key Success factors in E-retailing
E-retailing, also known as online retailing or e-commerce, refers to the practice of selling
products or services through digital channels, such as websites, mobile apps, social media
platforms, or marketplaces. It is a rapidly growing method of commerce that has revolutionized
the way people shop.

In e-retailing, customers can browse, select, and purchase products or services online using a
computer or mobile device. E-retailers typically maintain an online store where customers can
view product information, images, and reviews, and make a purchase using a secure payment
system. E-retailers can also leverage technology to offer personalized recommendations,
optimize the shopping experience, and provide fast and reliable shipping.

Success of e-retailing depends on Various factors:

 User-friendly website:

A well-designed and user-friendly website is essential for e-retailers. The website should be easy
to navigate, have clear product descriptions and images, and provide a seamless checkout
process.

 Mobile optimization:

With the growing use of mobile devices, e-retailers need to ensure their websites are optimized
for mobile devices, such as smartphones and tablets.

 Strong online presence:

E-retailers should maintain a strong online presence through social media, search engine
optimization (SEO), and other digital marketing strategies to attract and engage customers.

 Customer service:

Providing excellent customer service is critical for e-retailers to build customer loyalty and gain
repeat business. This includes prompt and helpful responses to customer inquiries, fast shipping,
and hassle-free returns.

 Competitive pricing:

E-retailers need to offer competitive pricing to remain competitive in the market. This may
involve offering discounts, promotions, or price matching.

 Wide range of products:

E-retailers should offer a wide range of products to appeal to different customer segments and
increase the likelihood of making a sale.

 Security and privacy:

E-retailers must ensure the security and privacy of customer information, including payment
details and personal information, to build trust and credibility with customers.

 Efficient supply chain:

E-retailers should have an efficient supply chain to ensure timely delivery and avoid stockouts or
overstocking.

 Data analytics:

E-retailers should use data analytics to track customer behavior, preferences, and trends to
inform marketing and product development strategies.

 Innovation and adaptability:

E-retailers need to be innovative and adaptable to changing customer needs, technological

advancements, and market trends to stay ahead of the competition.

Models of e-Commerce
Electronic commerce, or e-commerce, (e-Commerce) is a type of business model, or segment
of a larger business model, that enables a firm or individual to conduct business over an
electronic network, typically the internet. Electronic commerce operates in all four of the major
market segments: business to business, business to consumer, consumer to consumer, and
consumer to business. It can be thought of as a more advanced form of mail-order purchasing
through a catalog.

Types of e-Commerce

There are 6 basic types of e-commerce

1. Business-to-Business (B2B)
2. Business-to-Consumer (B2C)
3. Consumer-to-Consumer (C2C)
4. Consumer-to-Business (C2B)
5. Business-to-Administration (B2A)
6. Consumer-to-Administration (C2A)
1. Business-to-Business (B2B)

Business-to-Business (B2B) e-commerce encompasses all electronic transactions of goods or

services conducted between companies. Producers and traditional commerce wholesalers
typically operate with this type of electronic commerce.

2. Business-to-Consumer (B2C)

The Business-to-Consumer type of e-commerce is distinguished by the establishment of

electronic business relationships between businesses and final consumers. It corresponds to the
retail section of e-commerce, where traditional retail trade normally operates.

These types of relationships can be easier and more dynamic, but also more sporadic or
discontinued. This type of commerce has developed greatly, due to the advent of the web, and
there are already many virtual stores and malls on the Internet, which sell all kinds of consumer
goods, such as computers, software, books, shoes, cars, food, financial products, digital
publications, etc.
Figure: B2C Communication

3. Consumer-to-Consumer (C2C)

Consumer-to-Consumer (C2C) type e-commerce encompasses all electronic transactions of

goods or services conducted between consumers. Generally, these transactions are conducted
through a third party, which provides the online platform where the transactions are actually
carried out.
Figure: C2C Communication

4. Consumer-to-Business (C2B)

In C2B there is a complete reversal of the traditional sense of exchanging goods. This type of e-
commerce is very common in crowd sourcing based projects. A large number of individuals
make their services or products available for purchase for companies seeking precisely these
types of services or products.

Examples of such practices are the sites where designers present several proposals for a company
logo and where only one of them is selected and effectively purchased. Another platform that is
very common in this type of commerce are the markets that sell royalty-free photographs,
images, media and design elements, such as iStockphoto.

Figure: C2B Communication

5. Business-to-Administration (B2A)

This part of e-commerce encompasses all transactions conducted online between companies and
public administration. This is an area that involves a large amount and a variety of services,
particularly in areas such as fiscal, social security, employment, legal documents and registers,
etc. These types of services have increased considerably in recent years with investments made
in e-government.
Figure: B2A/C2A Communication

6. Consumer-to-Administration (C2A)

The Consumer-to-Administration model encompasses all electronic transactions conducted

between individuals and public administration.

Examples of applications include:

Education: disseminating information, distance learning, etc.

Social Security: through the distribution of information, making payments, etc.

Taxes: filing tax returns, payments, etc.

Health: appointments, information about illnesses, payment of health services, etc.

Both models involving Public Administration (B2A and C2A) are strongly associated to the idea
of efficiency and easy usability of the services provided to citizens by the government, with the
support of information and communication technologies.

e-commerce: Meaning, Characteristics,

Advantage and Disadvantage
E-Commerce or Electronic Commerce means buying and selling of goods, products, or services
over the internet. E-commerce is also known as electronic commerce or internet commerce.
These services provided online over the internet network. Transaction of money, funds, and data
are also considered as E-commerce. These business transactions can be done in four ways:
Business to Business (B2B), Business to Customer (B2C), Customer to Customer (C2C),
Customer to Business (C2B). The standard definition of E-commerce is a commercial transaction
which is happened over the internet. Online stores like Amazon, Flipkart, Shopify, Myntra,
Ebay, Quikr, Olx are examples of E-commerce websites. By 2020, global retail e-commerce can
reach up to $27 Trillion.

E-commerce is a popular term for electronic commerce or even internet commerce. The name is
self-explanatory, it is the meeting of buyers and sellers on the internet. This involves the
transaction of goods and services, the transfer of funds and the exchange of data.

So when you log into your Amazon and purchase a book, this is a classic example of an e-
commerce transaction. Here you interact with the seller (Amazon), exchange data in form of
pictures, text, address for delivery etc. and then you make the payment.

Characteristics of E-Commerce

E-commerce is characterized by the following features:

(i) The business tools are electronic and the application is commerce, i.e. profit motive.

(ii) Business is externally focused on those with whom business is conducted.

(iii) Most of the transactions are processed automatically.

(iv) Uses a gamut of business support services, such as inter-organizational e-mail and on-line
directories.

Examples of E-Commerce

 Amazon
 Flipkart
 eBay
 Fiverr
 Upwork
 Olx
 Quikr

Scope of e-commerce

The scope of e-commerce is broad and continues to expand as technology advances and
consumer behaviors evolve. It encompasses various dimensions, including types of transactions,
market participants, technological platforms, and industries it affects.

Types of Transactions

1. Business-to-Business (B2B):

E-commerce transactions between businesses, such as between manufacturers and wholesalers,

or between wholesalers and retailers.

2. Business-to-Consumer (B2C):

Transactions between businesses and individual consumers. This is the most recognized form of
e-commerce, including online retail and services.

3. Consumer-to-Consumer (C2C):

Transactions between consumers, usually facilitated by a third party that provides an online
platform (e.g., eBay, Etsy).

4. Consumer-to-Business (C2B):

Individuals sell products or services to businesses, which is common in freelancing platforms

and stock photo websites.

5. Business-to-Government (B2G) or Government-to-Business (G2B):

Transactions between companies and public sector organizations, often related to tenders and
procurement.
 6. Government-to-Citizen (G2C):

Services provided by the government to its citizens through online platforms, which can include
tax filing, registration services, and information dissemination.

Market Participants

 Retailers:

Both traditional brick-and-mortar stores expanding online and online-only retailers.

 Wholesalers and Distributors:

Entities involved in the bulk selling and distribution of products to retailers or other wholesalers.

 Manufacturers:

Producers of goods selling directly to consumers, businesses, or through intermediaries.

 Service Providers:

Companies offering services (e.g., streaming, cloud computing, online education) rather than
tangible goods.

 Consumers:

Individuals purchasing goods or services for personal use.

 Governments:

Engaging in e-commerce for procurement, service delivery, and information dissemination.

Technological Platforms

 Online Marketplaces:

Platforms that connect sellers and buyers, facilitating transactions (e.g., Amazon, Alibaba).

 E-commerce Websites:

Dedicated websites owned by retailers or brands that offer goods or services directly to
consumers or businesses.

 Mobile Apps:

Applications designed for smartphones and tablets, enabling mobile commerce (m-commerce).
  Social Commerce:

The use of social media platforms to promote and sell products and services directly within the
platform.

 Electronic Data Interchange (EDI):

The computer-to-computer exchange of business documents in a standard electronic format,

primarily used in B2B transactions.

Industries Affected

Virtually every industry has been impacted by e-commerce, including:

 Retail: Clothing, electronics, home goods, groceries, and more.

 Services: Banking, travel, education, entertainment, real estate.
 Manufacturing: Direct-to-consumer sales, customization, and global supply chain management.
 Healthcare: Telemedicine, online pharmacies, and personal health records.
 Finance: Online banking, digital wallets, and fintech services.

Future Scope

The future scope of e-commerce includes further integration of artificial intelligence for
personalized shopping experiences, expansion of augmented reality to try products virtually,
growth of voice commerce, and the exploration of new payment methods like cryptocurrencies.
Additionally, the global nature of e-commerce will continue to emphasize cross-border trade,
logistics innovations, and the digital transformation of traditional businesses.

Benefits of e-Commerce:

For Businesses:

 Wider Market Reach:

E-commerce breaks down geographical barriers, enabling businesses to reach a global audience
without the need for physical stores.

 Lower Operational Costs:

Operating an online store can significantly reduce the need for physical space, resulting in lower
rent, utilities, and staffing costs.

 Open 24/7:

Online stores can operate around the clock, allowing businesses to generate sales even outside of
traditional business hours.
  Data Collection and Personalization:

E-commerce platforms facilitate the collection of valuable customer data, which can be used to
personalize marketing efforts and improve product offerings.

 Scalability:

E-commerce businesses can easily scale their operations up or down based on market demand
without substantial investments.

 Faster Go-to-Market Time:

Launching products online is quicker and less costly, allowing businesses to capitalize on trends
and market demand efficiently.

For Consumers:

 Convenience:

E-commerce offers the ultimate convenience of shopping from anywhere at any time, without the
need to visit physical stores.

 Broader Selection:

Online stores often provide a wider variety of products than physical stores, including items that
are rare or not locally available.

 Price Comparisons:

Consumers can easily compare prices and read reviews from other customers before making a
purchase decision.

 No Pressure Sales:

Shopping online eliminates the pressure often felt from sales staff in physical stores, allowing for
more relaxed decision-making.

 Access to International Products:

E-commerce makes it easier for consumers to purchase products from abroad that may not be
available in their home country.

 Personalized Shopping Experience:

Online stores can offer personalized recommendations based on previous purchases and
browsing behavior.
For Society:

1. Environmental Impact:

With reduced needs for physical infrastructure and the potential for more efficient logistics, e-
commerce can contribute to lower carbon footprints compared to traditional retail.

2. Job Creation:

While e-commerce changes the nature of retail jobs, it also creates new opportunities in areas
such as digital marketing, data analysis, IT, and logistics.

3. Accessibility:

E-commerce provides access to goods and services for people who are physically unable to visit
stores, such as the elderly or individuals with disabilities.

Limitations of e-Commerce:

For Businesses:

 Intense Competition:

The ease of setting up online businesses leads to increased competition, making it harder for
individual businesses to stand out and retain market share.

 Technical Issues:

Dependency on technology means that technical glitches, website downtime, or cybersecurity

breaches can have significant negative impacts on sales and customer trust.

 Customer Service Challenges:

Providing effective and timely customer service can be more challenging online, especially with
high volumes of inquiries and the lack of face-to-face interaction.

 Return and Refund Processes:

Handling returns and refunds can be more complicated and costly for online businesses, affecting
profitability.

 Fraud and Security Concerns:

E-commerce sites are attractive targets for cybercriminals, necessitating ongoing investment in
security measures to protect customer data.
For Consumers:

 Lack of Physical Examination:

Consumers cannot touch, feel, or try products before purchase, leading to uncertainty and
potential dissatisfaction.

 Privacy and Security Risks:

Online shoppers are at risk of personal data breaches, identity theft, and fraud if they use
insecure or fraudulent sites.

 Delivery Issues:

Delays, lost packages, and damage during shipping can detract from the online shopping
experience.

 Difficulty in Returning Items:

The process of returning products can be cumbersome and sometimes costly for consumers,
dissuading them from making online purchases.

 Overwhelming Choices:

While a wide selection is an advantage, it can also overwhelm consumers, leading to decision
fatigue.

For Society:

 Impact on Local Retailers:

The growth of e-commerce can negatively impact physical stores and local economies, leading to
closures and job losses in traditional retail sectors.

 Environmental Impact of Deliveries:

Although e-commerce reduces the need for physical stores, the increase in packaging waste and
emissions from increased delivery traffic can have negative environmental impacts.

 Digital Divide:

The benefits of e-commerce are not equally accessible to all, with disparities based on internet
access, digital literacy, and socioeconomic status.

 Work Conditions:
Some e-commerce fulfillment centers have faced criticism for poor working conditions,
including intense work pace and inadequate labor rights.

 Consumerism:

The ease and convenience of online shopping may encourage excessive consumerism and
wasteful purchasing behaviors.

Web-enabled Services, Information Selling

on the web, Entertainment
Web-enabled services

Web-enabled services refer to online services that enable customers to complete tasks or access
information remotely. Examples include online banking, e-learning platforms, online consulting
services, and online booking systems for travel, hospitality, or events. Web-enabled services can
provide customers with convenience, flexibility, and cost savings.

Web-enabled services:

 Online banking and financial services

 E-learning platforms and online courses
 Online consulting services, such as legal or accounting advice
 Online booking systems for travel, hospitality, or events
 Remote healthcare and telemedicine services
 Online food ordering and delivery services
 Cloud computing and storage services

Information selling on the web:

Information selling on the web involves the sale of digital content, such as ebooks, music,
videos, and software, through online platforms or marketplaces. Information selling on the web
can provide customers with easy access to a wide range of digital content, while also providing
creators with a platform to monetize their intellectual property.

 Ebooks and digital publications

 Music and audio content, such as songs, albums, and podcasts
 Video content, such as movies, TV shows, and streaming services
 Software and digital tools, such as productivity apps, design tools, and programming languages
 Digital artwork and graphics

Entertainment refers to e-commerce that involves the sale of entertainment products or

services, such as streaming services, gaming platforms, and online ticket sales for movies,
concerts, and events. Entertainment e-commerce can provide customers with a personalized and
immersive experience, while also offering businesses opportunities for cross-selling and
upselling.

 Streaming services, such as Netflix, Hulu, and Disney+

 Gaming platforms and online gaming communities
 Online ticket sales for movies, concerts, and events
 Virtual reality and augmented reality experiences
 Social media platforms and online communities for entertainment purposes

Web Auctions
An online auction (also electronic auction or E-Auction or e-auction or eAuction) is an
auction which is held over the internet. Like auctions in general, online auctions come in a
variety of types like ascending English auctions, descending Dutch auctions, first-price sealed-
bid, Vickrey auctions and others, which are sometimes not mutually exclusive.

The scope and reach of these auctions have been propelled by the Internet to a level beyond what
the initial purveyors had anticipated. This is mainly because online auctions break down and
remove the physical limitations of traditional auctions such as geography, presence, time, space,
and a small target audience. This influx in reachability has also made it easier to commit
unlawful actions within an auction. In 2002, online auctions were projected to account for 30%
of all online e-commerce due to the rapid expansion of the popularity of the form of electronic
commerce. Online auctions include business to business (B2B), business to consumer (B2C), and
consumer to consumer (C2C) auctions.

The largest online auction site is eBay, which was the first to support person-to-person
transactions. Other popular examples of online auction sites include WebStore, OnlineAuction
and Overstock.

English auctions

In live terms, English auctions are where bids are announced by either an auctioneer or by the
bidders and winners pay what they bid to receive the object. English auctions are claimed to be
the most common form of third-party on-line auction format used and is deemed to appear the
most simplistic of all the forms. The common operational method of the format is that it is an
ascending bid auction in which bids are open for all to see. The winner is the highest bidder and
the price is the highest bid. The popularity of the English auction is due to the fact that it uses a
mechanism that people find familiar and intuitive and therefore reduces transaction costs. It also
transcends the boundaries of a traditional English auction where physical presence is required by
the bidders, making it increasingly popular even though there is a susceptibility to various forms
of cheating. In the ascending-price auction, it is a ‘dominant strategy’ to stay in the auction until
the price reaches the bidder’s value.
Dutch auctions

Dutch auctions are the reverse of English auctions whereby the price begins high and is
systematically lowered until a buyer accepts the price. Dutch auction services are usually
misleading and the term ‘Dutch’ tends to have become common usage for the use of a multiunit
auction in a single unit auction as opposed to how it is originally intended for that of a declining
price auction. However, with actual on-line Dutch auctions where the price is descending, it was
found that auctions have on average a 30% higher ending price than first-price auctions with
speculation pointing to bidder impatience or the effect of endogenous entry on the Dutch auction.

First-price sealed-bid

First-price sealed-bid auctions are when a single bid is made by all bidding parties and the single
highest bidder wins, and pays what they bid. The main difference between this and English
auctions is that bids are not openly viewable or announced as opposed to the competitive nature
which is generated by public bids. From the game-theoretic point of view, the first-price sealed-
bid auction is strategically equivalent to the Dutch auction; that is, in both auctions the players
will be using the same bidding strategies.

Vickrey auction

A Vickrey auction, sometimes known as a second-price sealed-bid auction, uses very much the
same principle as a first-price sealed bid. However, the highest bidder and winner will only pay
what the second highest bidder had bid. The Vickrey auction is suggested to prevent the
incentive for buyers to bid strategically, due to the fact it requires them to speak the truth by
giving their true value of the item. If a bidder makes a very high bid, they may have to pay that
price, but if they make a low bid there is a chance that they will lose the item. Therefore, the
winner is the person who values the item the highest. It’s a win-win situation for both the seller
and the winner.

Reverse auction

Reverse auctions are where the roles of buyer and seller are reversed. Multiple sellers compete to
obtain the buyer’s business and prices typically decrease over time as new offers are made. They
do not follow the typical auction format in that the buyer can see all the offers and may choose
which they would prefer. Reverse auctions are used predominantly in a business context for
procurement. Reverse auctions bring buyers and sellers together in a transparent marketplace.
The practice has even been implemented for private jet travel on the online auction site
Marmalade Skies. IP The term reverse auction is often confused with unique bid auctions, which
are more akin to traditional auctions as there is only one seller and multiple buyers. However,
they follow a similar price reduction concept except the lowest unique bid always wins, and each
bid is confidential.
Bidding fee auction

A bidding fee auction (also known as a penny auction) requires customers to pay for bids, which
they can increment an auction price one unit of currency at a time. On English auctions for
example, the price goes up in 1 pence (0.01 GBP) increments. There has been criticism that
compares this type of auction to gambling, as users can spend a considerable amount of money
without receiving anything in return (other than the spent bids trying to acquire the item). The
auction owner (typically the owner of the website) makes money in two ways, the purchasing of
bids and the actual amount made from the final cost of the item.

Models

In addition to the basic types of online auctions, there are also two main models.

Common-value model

In this model all individual bidders have different information about the actual value of the
object (e.g. whether they think the piece of art is fake or genuine) even though the value is
known to every bidder. In this situation bidders typically change their estimates of the value
according to the information they get from the behavior of the people they bid against.

Private-value model

In this model information from the competitors is not taken into account when estimating the
actual value of the object. In these models, each bidder gets a private signal, and the value to the
bidder is a function of all signals.

Auction squatting

Is a technique involving placing early bids and then watching the auction until the very end. The
main tactic is to look for other bids in order to be able to match them as fast as possible as and
more often than any other competitor. This sends a signal of how serious you are about the
auction and could scare off the rest of the bidders.

Auction sniping

A strategy involving waiting up until the last seconds of an online auction and then submitting
your bid with a goal of “stealing” the auction from everyone else.

It is not possible to perform this technique on every online auction, most of them will extend
time if there is a bid with only a few seconds left. Even with this precaution of auction sites,
auction sniping is still a very successful tool used to win.
Beginning with a high bid

In some cases, the best strategy is to put a high bid first instead of starting off with low bids. Low
bids might achieve a lower price, but on the other hand invite more bidders, whereas directly
stating your value of the object by putting a high bid right from the start might intimidate the
competition.

Legalities

Shill bidding

Placing fake bids that benefits the seller of the item is known as shill bidding. This is a method
often used in online auctions but can also happen in standard auctions. This is seen as an
unlawful act as it unfairly raises the final price of the auction, so that the winning bidder pays
more than they should have. If the shill bid is unsuccessful, the item owner needs to pay the
auction fees. In 2011, a member of eBay became the first individual to be convicted of shill
bidding on an auction. By taking part in the process, an individual is breaking the European
Union fair trading rules which carries out a fine of up to £5,000 in the United Kingdom.

Shield bidding

A technique involving a buyer using another account (called a “shield”) to discourage other
competitors from bidding by artificially increasing the price and then at the last moment
withdrawing their bid to allow the actual buyer to win the auction with a lower price. Most
online auction sites don’t allow withdrawing bids, therefore making this technique impossible to
perform. Although this doesn’t stop people from taking advantage of sites where this rule is not
implemented. Of course, it’s hard for an online auction user to spot a shill or a shield through the
faceless online world.

Spotting Shills and Shields

It is not an easy task to spot a dirty technique being used by someone basically anonymous in
online auctions, but it is certainly doable. It can be revealed by examining all previous seller’s
sales and looking for an account which has bid on every or almost every auction of this seller. If
there is someone suspicious like that, it is most probably a shill using the account to increase the
price.

A shield can be spotted similarly to a shill. By doing a search of a person’s all won auctions it
can be found out whether there is another account participating in exactly the same auctions
without ever winning anything, or not. If there is, it is possible that the person is using a shield to
help him be successful in auctions.

Fraud

The increasing popularity of using online auctions has led to an increase in fraudulent activity.
This is usually performed on an auction website by creating a very appetizing auction, such as a
low starting amount. Once a buyer wins an auction and pays for it, the fraudulent seller will
either not pursue with the delivery, or send a less valuable version of the purchased item
(replicated, used, refurbished, etc.). Protection to prevent such acts has become readily available,
most notably PayPal’s buyer protection policy. As PayPal handles the transaction, they have the
ability to hold funds until a conclusion is drawn whereby the victim can be compensated.

Sale of stolen goods

Online auction websites are used by thieves or fences to sell stolen goods to unsuspecting buyers.
According to police statistics there were over 8000 crimes involving stolen goods, fraud or
deception reported on eBay in 2009. It has become common practice for organised criminals to
steal in-demand items, often in bulk. These items are then sold online as it is a safer option due
to the anonymity and worldwide market it provides. Auction fraud makes up a large percentage
of complaints received by the FBI’s Internet Crime Complaint Center (IC3). This was around
45% in 2006 and 63% in 2005.