The strategic advantages of this business model include:
No time constraints. Bids can be placed at any time of the day or night. 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.
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, the number of sellers and the number of bidders and therefore the number of bids for each item. The items do not need to be shipped to a central location thereby reducing costs further, while also reducing the seller’s minimum acceptable price.
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.
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 number of bidders.
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 also a large number of sellers.
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.
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.
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