Electronic Commerce 9th Edition Chapter 7 Online Auctions, Virtual Communities, and Web Portals Electronic Commerce, 9th Edition 1

22 Learning Objectives In this chapter, you will learn about: Origins and key characteristics of the seven major auction types Strategies for Web auction sites and auction-related businesses Virtual communities and Web portals

Electronic Commerce, 9th Edition3 Auction Overview Business use of the Web –Improve existing processes –New items Running auctions Creating virtual communities Operating Web portals Online auctions provide business opportunity –Charge buyers and sellers –Sell targeted advertising Strength of Internet –Brings people together: common narrow interest

Electronic Commerce, 9th Edition4 Origins of Auctions Common activity of 17th century England Auction: seller offering item for sale –Bids: price potential buyer willing to pay –Bidders: potential buyers –Private valuations: amounts seller willing to pay –Auctioneer: manages auction process –Shill bidders: bidder who seller or auctioneer employees May artificially inflate price

Electronic Commerce, 9th Edition5 English Auctions Bidders publicly announce successively higher bids –Stop at highest bid Item sold to highest bidder (at bidder’s price) Also known as: –Ascending-price auction –Open auction (open-outcry auction) Bids publicly announced Minimum bid –Beginning price –If not met: item removed (not sold)

Electronic Commerce, 9th Edition6 English Auctions (cont’d.) Reserve price (reserve) –Seller’s minimum acceptable price –Not announced –If not exceeded: item withdrawn (not sold) Yankee auction –Multiple item units offered for sale Bidders specify quantity –Highest bidder allotted bid quantity –Remaining items allocated to next highest bidders Until all items distributed –Bidders pay lowest successful bidder price

Electronic Commerce, 9th Edition7 English Auctions (cont’d.) English auction seller drawback –May not obtain maximum possible price English auction buyer drawback –Winner’s Curse Psychological phenomenon Caught up in competitive bidding excitement Bidders risk bidding more than their private valuations

Electronic Commerce, 9th Edition8 Dutch Auctions Open auction –Bidding starts at a high price Drops until bidder accepts price Also called descending-price auctions Seller offers number of similar items for sale Advantages –Seller obtains close to highest private valuation –Quickly move large numbers of commodity items Disadvantages –Sales or product interest generated: does not justify cost of operation –Customer confusion

Electronic Commerce, 9th Edition9 First-Price Sealed-Bid Auctions Sealed-bid auctions –Bidders submit bids independently Prohibited from sharing information First-price sealed-bid auction –Highest bidder wins –If multiple items auctioned: next highest bidders awarded remaining items At their bid price

Electronic Commerce, 9th Edition10 Second-Price Sealed-Bid Auctions Second-price sealed-bid auction –Same as first-price sealed-bid auction Exception –Highest bidder awarded item at second-highest bidder price

Electronic Commerce, 9th Edition11 Open-Outcry Double Auctions Open-outcry double auctions –Sealed bid or open outcry –Good for: items of known quality traded in large quantities –No item inspection before bidding Example –Chicago Board of Trade: commodity futures and stock options –Buy and sell offers shouted by traders in trading pit Each commodity, stock option traded in own pit Quite frenzied

Electronic Commerce, 9th Edition12 Sealed-Bid Double Auctions Double auction –Buyers, sellers submit combined price-quantity bids Auctioneer –Matches sellers’ offers Starting with lowest price and then goes up –To buyers’ offers Starting with highest price and then goes down until all quantities offered are sold Operation format –Sealed bid or open-outcry Example: New York Stock Exchange

Electronic Commerce, 9th Edition13 Reverse (Seller Bid) Auctions Reverse auction (seller-bid auction) –Multiple sellers submit price bids Auctioneer represents single buyer –Bids for given amount of specific item to purchase –Prices go down as bidding continues Until no seller is willing to bid lower Used by consumers Largest dollar volume –Businesses: both buyers and sellers Buyer acts as auctioneer Screens sellers before participation

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Electronic Commerce, 9th Edition15 Online Auctions and Related Businesses Online auction business is rapidly changing Three auction Web site categories –General consumer auctions –Specialty consumer auctions –Business-to-business auctions Consumer auctions –Considered business-to-consumer e-commerce –E-commerce Considered Consumer-to-business Bidders might be businesses

Electronic Commerce, 9th Edition16 General Consumer Auctions eBay –Registration required, seller fees, rating system –Seller’s risk Stolen credit cards; buyer fails to conclude transaction –Buyer’s risk No item delivery; misrepresented item –Most common auction format: English auction Seller may set reserve price Bidders listed: bids not disclosed (until auction end) Continually updated high bid amount displayed Private auction option

Electronic Commerce, 9th Edition17 General Consumer Auctions (cont’d.) eBay (cont’d.) –Minimum bid increment Amount by which one bid must exceed previous bid –Proxy bid Bidder specifies maximum bid May cause bidding to rise rapidly eBay stores –Integrated into auction site –Sellers generate additional profits

Electronic Commerce, 9th Edition18 Specialty Consumer Auctions Specialized Web auction sites –Meet special-interest market needs –No need to compete with eBay Early Web auction sites (first wave) –Featured technology items Doug Salot: Haggle Online (now uBid) Other specialized auction sites (second wave) –JustBeads.com, StubHub –Cigarbid.com, Golf Club Exchange, Winebid Strong market segments; readily identifiable products Desired by people with high disposable incomes

Electronic Commerce, 9th Edition19 Business-to-Business Auctions Evolved to meet specific existing need –Excess inventory disposal (manufacturing) Two traditional methods –Large companies Liquidation specialists find buyers for unusable items –Small companies Liquidation broker firms find buyers for items

Electronic Commerce, 9th Edition20 Business-to-Business Auctions (cont’d.) Emerging business-to-business Web auction models –Direct descendants of traditional methods –Large-company model Business creates its own auction site – Small-company model Third-party Web auction site instead of liquidation broker Resembles consumer online auctions

Electronic Commerce, 9th Edition21 Virtual Communities: Web Portals and Social Networks Money-making Internet and Web approaches –Virtual communities –Web portals

Electronic Commerce, 9th Edition22 Virtual Communities Virtual community (Web community, online community) –Gathering place for people and businesses Does not have physical existence –Various forms of Internet existence Usenet newsgroups, chat rooms, Web sites –People connect and discuss common issues, interests –Considerable social interaction –Relationship-forming activities Similar to physical communities Virtual learning community –Distance learning platforms (Blackboard) –Open-source software (Moodle and uPortal)

Electronic Commerce, 9th Edition23 Virtual Communities (cont’d) Web portal sites –Allow site visitors to interact with each other Combine search engines, directories, free , chat rooms, games Fulfill individual social interaction needs Help companies, customers, suppliers –Plan, collaborate, transact business, interact

Electronic Commerce, 9th Edition24 Early Web Communities 1985 (predates the Web) –WELL (“whole earth ‘lectronic link”) Monthly fee to participate in forums and conferences –1999 bought by Salon.com Monthly subscription fee or premium subscription 1995: Beverly Hills Internet virtual community site –Offered webcams, free Web site space –Grew into GeoCities Revenue: advertising, pop-up pages 1999: purchased by Yahoo! ($5 billion)

Electronic Commerce, 9th Edition25 Early Web Communities (cont’d.) 1995: Tripod virtual community –Offered free Web page space, chat rooms, news, weather updates, health information pages –Revenue: sold advertising –1998: purchased by Lycos ($58 million) 1995: Theglobe.com Cornell University class project –Included bulletin boards, chat rooms, discussion areas, personal ads Added more features –Revenue: sold advertising –2001: closed

Electronic Commerce, 9th Edition26 The Second Wave of Electronic Commerce: Social Networking As the Internet and Web grew: –Experiences of online communication faded –New phenomenon in online communication began Internet no longer focus of community (became a tool) Enabled communication among community members Social networking sites –New Web site category designed to facilitate interactions among people

Electronic Commerce, 9th Edition27 The Second Wave of Electronic Commerce: Social Networking (cont’d.) Friendster: Jonathan Abrams (2002) Facebook, LinkedIn, Tribe.net –Tools to make new local friends, establish acquaintances, obtain advice YouTube: popularized video inclusion MySpace: popular with younger Web users Basic idea –People invited to join by existing members –Site provides directory Member offers to communicate with any other member Intended recipient must approve contact

Electronic Commerce, 9th Edition28 The Second Wave of Electronic Commerce: Social Networking (cont’d.) Web logs (Blogs) –Web sites containing individual commentary on current events or specific issues –Form of social networking site Encourage interaction among people Visitors add comments Early blogs focused on technology topics 2004: blogs used as political networking tool 2008: all major candidates using blogs –Communicating messages, organizing volunteers, raising money

Electronic Commerce, 9th Edition29 The Second Wave of Electronic Commerce: Social Networking (cont’d.) Social networking Web sites for shoppers –Sense of community to generate revenue –Social shopping Practice of bringing buyers and sellers together in a social network to facilitate retail sales –Example: Etsy Web site Marketplace for selling handmade items We Love Etsy: Etsy buyers, sellers share information

Electronic Commerce, 9th Edition30 Revenue Models for Social Networking Sites 1990 –Virtual communities, search engine sites, Web directories selling advertising Generate revenue 1998 –Purchases and mergers occurred –New sites still used advertising-only revenue- generation model Included features offered by virtual community sites, search engine sites, Web directories, other information- providing and entertainment sites –Goal: be every Web surfer’s doorway to the Web

Electronic Commerce, 9th Edition31 Revenue Models for Social Networking Sites (cont’d.) Advertising-supported social networking sites –Smaller with specialized appeal Draw enough visitors to generate significant advertising revenue –Example: I Can Has Cheezburger site Social networking sites –Members provide demographic information Potential for targeted marketing: very high

Electronic Commerce, 9th Edition32 Revenue Models for Social Networking Sites (cont’d.) Mixed-revenue and fee-for-service social networking sites –Most successful Web portals: Time Warner’s AOL Charged fee and ran advertising –Yahoo!: now charges for Internet phone service, “premium” service Increased its revenues from non-advertising sources –New strategy: monetizing Converting existing regular site visitors seeking free information or services into fee-paying subscribers Backlash concerns

Electronic Commerce, 9th Edition33 Revenue Models for Social Networking Sites (cont’d.) Fee-based social networking –2002 to 2006: Google Answers site (fee based) Attempt to monetize social networking –Similar sites: Yahoo! Answers, Amazon (Askville) Volunteers answer questions (no fees) Services generate advertising revenue –Uclue (researchers earn 75 percent of total fee) Advantages: higher-quality answers, questions more serious, better formulated –Web sites generate revenue by providing virtual community interaction

Electronic Commerce, 9th Edition34 Summary Look at how companies using the Web to do entirely new things –Running auctions, creating virtual communities, operating Web portals Key characteristics of seven major auction types Consumer online auction business dominated by eBay (United States) New industries to meet needs of auction participants

Electronic Commerce, 9th Edition35 Summary (cont’d.) Ways sellers and buyers can protect themselves New approaches to making money on the Internet and the Web –Virtual communities and Web portals Social networking sites –Emerging as important parts of electronic commerce