The online auction business model is one in which participants bid for products and services over the Internet. The functionality of buying and selling in an auction format is made possible through auction software which regulates the various processes involved.

Several types of online auctions are possible. In an English auction the initial price starts low and is bid up by successive bidders. In a Dutch auction, multiple identical items are offered in one auction, with all winning bidders paying the same price -- the highest price at which all items will be sold (treasury bills, for example, are auctioned this way). Almost all online auctions use the English auction method.

Strengths of the business model

The strategic advantages of this business model include:

1. No time constraints. Bids can be placed at any time (24/7). Items are listed for a number of days (usually between 1 and 10, at the discretion of the seller), giving purchasers time to search, decide, and bid. This convenience increases the number of bidders.
2. No geographical constraints. Sellers and bidders can participate from anywhere that has internet access. This makes them more accessible and reduces the cost of "attending" an auction. This increases the number of listed items (ie.: number of sellers) and the number of bids for each item (e.g.: number of bidders). The items do not need to be shipped to a central location, reducing costs, and reducing the seller's minimum acceptable price.
3. Intensity of social interactions. The social interactions involved in the bidding process are very similar to gambling. The bidders wait in anticipation hoping they will "win." Much like gambling addiction, some bidders may bid primarily to "play the game" rather than to obtain products or services. This creates a highly loyal customer segment. This can also skew the prices of items/services/goods in the auction.
4. Large number of bidders. Because of the potential for a relatively low price, the broad scope of products and services available, the ease of access, and the social benefits of the auction process, there are a large numbers of bidders.
5. Large number of sellers. Because of the large number of bidders, the potential for a relatively high price, reduced selling costs, and ease of access, there are a large number of sellers.
6. Network economies. The large number of bidders will encourage more sellers, which, in turn, will encourage more bidders, which will encourage more sellers, etc., in a virtuous circle. The more the circle operates, the larger the system becomes, and the more valuable the business model becomes for all participants.
7. Captures consumers' surplus. Auctions are a form of first degree price discrimination. As such, they attempt to convert part of the consumers' surplus (defined as the area above the market price line but below the firm's demand curve) into producers' surplus.

Criticism

Auction sites, like garage sales, flea markets, classified advertisements and other independent sales venues, sometimes draw criminals wishing to sell stolen products, but for law enforcement organizations, finding stolen goods offered online is sometimes easier than more traditional detection methods.[1]

Some criticism is leveled at online auction websites for uneven representation of items offered for sale. Descriptions may omit important information, and photos may not be adequate. Potential bidders can typically protect themselves by reading the text, studying photographs and asking questions of the seller before bidding. Studies show that a large proportion of unsatisfactory online purchase experiences are the result of careless consumerism.[citation needed]

In the U.S., large retailers have lobbied Congress to require online auction sites to share private sales information about sellers, citing potential illegalities. Within the online auction community this is commonly viewed as an attempt at unfair market protection and trade restraint. Reduced overhead sometimes enables independent online sellers to offer goods at lower prices than large retailers.

Online auction selling has attracted millions of laid-off workers, as well as the disabled, parents of young children, retirees, pensioners and others that are unable to find employment in the mainstream workforce.[citation needed] Online auction venue corporations are accused of engaging in discriminatory trade practices that unfairly impact such customers. Presently, the trading practices of online auction venue corporations is not regulated by state or federal agencies.[citation needed]