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= Online Auction Content =

thumb|250px|right|An example of a [[#Bidding fee auction | Bidding fee auction]]

An online auction is an auction which is held over the internet. Online auctions come in many different formats, but most popularly they are either ascending English Auctions, descending Dutch auctions, First-price sealed-bid, Second-price sealed-bid, Vickrey Auctions, or sometimes even a combination of multiple auctions, taking elements of one and forging them with another. 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 due to the fact that 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. 

History
Online auctions were taking place even before the release of the first web browser for personal computers, NCSA Mosaic. Instead of users selling items through the Web they were instead trading through text-based newsgroups and email discussion lists. However, the first Web-based commercial activity regarding online auctions that made significant sales began in 1995 starting with Onsale in May and later that year in September eBay began trading.  Both of these auctions were ascending bid English auctions and the first of their kind to take advantage of the new technological opportunities offered by the Web, advantages such as the use of automated bids via electronic forms, a search engine to be able to quickly find items and allowing users to view by categories.

Online auctions have greatly increased the variety of goods and services that can be bought and sold using auction mechanisms along with also expanding the possibilities for the ways auctions can be conducted and in general created new uses for auctions. In the current web environment there are hundreds, if not thousands, of websites dedicated to online auction practices.

Types of online auctions
There are six different basic types of online auctions:

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

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. Sites that offer Dutch auction services are usually misleading and the term 'Dutch' tends to have become common usage for the use of a uniform-price rule 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.

Second-price sealed-bid
Second-price sealed-bid auctions are 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.

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.

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.

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.

Fraud
The increasing popularity of using online auctions has lead to an increase in fraudulent activity. This is usually performed on an auction website by creating a very appetising auction, such as a low starting amount. Once a buyer wins an auction and pays for it, the fradulent seller will either not persue 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 good on to unassuming 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.

Auction Sniping
Auction sniping is a controversial bidding technique used in timed online auctions. It is the practice of placing a bid in the final stages of an auction with the aim of removing other bidder's ability to place another bid before the auction ends. These bids can either be placed by the bidder manually or automatically with the use of a tool. There are tools available that have been developed for this purpose. However, the use of these tools is the subject of much controversy.

There are two different approaches employed by sniping tools.
 * Online: These are hosted on a remote server and are a service run by a third party.
 * Local: This type is a script which can downloaded onto the users computer which is then activated and ran locally.

Legality and acceptance by auction sites
While auction sniping is frowned upon by some people, it may not break any of the rules established by the auction site. For example it is permitted by eBay. eBay Germany banned automated sniping services in 2002, but the ban was declared illegal by Berlin's County Court, and revoked.

A few other auction sites (such as iGavel, the New Zealand auction site TradeMe, and the real estate auction site Bid on the City) automatically extend the bid deadline by a few minutes if a bid is placed in the last moments of the auction, to give other buyers time to react. Another way to prevent sniping is to end the auction at a random time (e.g., at any instant within a one-hour interval).

Strategic Reasons for Sniping
Experienced bidders of online auctions with fixed ending times often prefer entering bids late in the auction to avoid bidding wars (multiple rounds of bidders each increasing their maximum bid to temporarily regain "current highest bid" status) or bid chasing (where the presence of an existing bid encourages others to bid on the same item).

Economic analysis of sniping (Roth and Ockenfels, 2000 ) suggests that sniping is a rational gain-maximizing (i.e., price-minimizing) strategy for bidders in auctions which fulfill two criteria: 1) the end time is rigidly fixed, and 2) it is possible to gain additional information about the "true" value of the item by inspecting previous bids. For example, a novice antiques buyer may prefer to bid in auctions which already have bids placed by more experienced antiques buyers, on the grounds that the items which the experienced buyers are interested in are more likely to be valuable. In this case, more informed buyers may delay bidding until the last minutes of the auction to avoid creating competition for their bids, leading to a lower winning bid. Because of the practice of sniping, the highest bid 10 minutes before the end of a contested auction is often not at all representative of the eventual selling price.

Analysis of actual winning bids on eBay (Yang and Kahng, 2006 ) suggests that winning bidders are more likely to have placed a single bid late in the auction, rather than placing multiple incremental bids as the auction progresses.

Avoidance of Maximum Bid Fishing
Many online auctions use proxy bidding, an iterative sealed bid auction where winners pay a fixed increment over the second highest bid. The auctioner does not disclose the current maximum bid, but the second highest bid is always public.

In proxy bidding, the wise bidder must know in advance the "true" value of an item as a basis for their secret bidding limit. The fact that the maximum bid is revealed when it is outbid introduces the possibility of maximum bid fishing. Bidders unsure of the value of an item may incrementally increase their bid until they narrowly exceed the previously hidden maximum, thus placing themselves in a winning position without placing a very high bid.

Sniping eliminates this possibility and effectively converts the auction to a Vickrey auction, the same as a proxy bidding auction except that all bids are kept secret until the close of bidding.

Shill Avoidance
This opens a loop-hole to fraudulent practice by a shill which allows an agent for the seller, which may be another account of the seller to raise the bid to the maximum. They then hope the original bidder will increase their maximum bid even by a small amount to win the auction. The danger to the seller in this case is that the original bidder may not choose to increase their bid, leaving the seller with a futile transaction (selling the item to themselves) which will still incur a fee from the auction service. However, it is possible for the seller to avoid this fee by submitting a mutually agreed cancellation from the buyer and seller application which will result in the waiving of the auction fee as well as a 'free relist' credit.

Objections to bid sniping
Non-sniping bidders object to sniping, claiming that it is unfair to place bids at a point when it is impossible or unfeasible for other bidders to evaluate and possibly counter the bid, causing them to lose auctions even though they would have been willing to meet the winning bid amount. Bidders sometimes object to sniping when multiple, identical items are listed as separate lot, as they must wait until the last minute to find whether their maximum bid on one lot has been exceeded before being in a position to bid on another.

However, online auction sites, unlike live auctions, usually have an automatic bidding system which allows a bidder to enter the maximum acceptable bid. This is a hidden or proxy bid, known to the system, but not any other bidders; during the auction the actual bid is incremented only enough to beat the existing highest bid. For example, if an item's current maximum high bid is 57 and someone is prepared to pay 100 and bids accordingly, the displayed bid will be 58, with the hidden maximum of 100. Proxy bidding also discourages 'bidding wars', and can encourage 'opportunistic' bidding on low-priced items.

The failure of a maximum acceptable bid beaten by a sniper prepared to pay more is not due to the act of sniping, unless the original bidder would have bid higher when they saw the price rise. For this reason, opposition to sniping can be analyzed as more of a subjective reaction to simply losing an auction for the usual reason (not bidding high enough), than a reaction to a "dirty trick". In other words, you would have still beaten the sniper if you'd placed your maximum bid higher than the sniper is willing to pay.

However, if the minimum bid increment is very low, the Sorites paradox can come into play, and make it difficult for a person to establish a single maximum bid. For example, if the minimum bid increment on an auction is 10 cents, it can be difficult or impossible for a person to identify a price which they would be willing to pay to win the item, but they would not pay 10 cents more. The fear that 10 cents may make the difference between getting the item and losing it to a sniper can trigger unusual behaviour, such as deliberately bidding strange amounts (such as $274.81) to make it hard for snipers to guess the minimum required to outbid the current winner.

CAPTCHAs
One attempt to defeat automated bid sniping software is requiring bidders to pass a CAPTCHA test prior to entering their bid. This ensures that all bids are entered manually. The counter for this is for the software to re-direct the CAPTCHAs to a CAPTCHAs reading service.

Final Extension
Some online auction systems attempt to discourage sniping (manual or automatic) by automatically extending the auction time if a last-minute bid is placed. This approach leaves all bidding open, and allows any bidders who are watching during the final few minutes to raise the bid. It can also lead to last-minute automated out-of-control bidding wars between bidders, which can extend the bidding time long beyond what the seller desired, greatly raising the final selling price. Any site which implements a limit to the number of time extensions allowed simply causes a final extension snipe.

Buy It Now
Some auction systems, allow buyers to end an auction early by paying a predetermined final price for the item (generally substantially more than the minimum bid). This may discourage some sniping because another bidder can simply purchase the item outright while the sniper is waiting for the auction end time. Although if they did snipe for the item they could get it for substantially less than the Buy It Now price. In eBay this Buy It Now option disappears after the first bid is placed, and so the deterrent relates only to items that have yet to be bid on. In this case a sniper can switch the sale to an auction suitable for sniping by placing a very low bid on the item early on to make the Buy It Now option disappear, clearing the way for a snipe and preventing any other potential buyers from ending the auction early by buying the item at the Buy It Now price.

Articles and news reports

 * Mathematicians snipe to win on eBay (23 June 2006, NewScientist.com news service)
 * Best to bid late on eBay
 * On eBay, it pays to snipe (Posted 6/25/2006 6:21 PM ET, From USATODAY news)
 * Why sniping with one's maximum value is the optimal bidding strategy for eBay (27 April 2004)
 * How to Outbid the Fanatics: Software That Never Sleeps (5 September 2002)
 * eBay Bidders Sold on Sniping (23 September 2002)

Category:Auctioneering

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