Online auctions are fast becoming an important facet of e-commerce. There are, however, important differences between online auctions and traditional ones, which in turn means that the assumptions and analyses applied to traditional auctions do not always carry over into the online environment. Based on an analysis of 90 auction sites, this paper suggests ways for auctioneers to maximize their revenues in an online environment.

The authors note a number of important differences between online and traditional auctions. Online auctions are not limited by physical space, and they can run for longer time periods than their traditional counterparts; they attract a widely dispersed consumer base from all around the globe; and the majority of online auctions are used to sell multiple identical units of an item to multiple bidders, rather than a single item to one bidder.

Using an automated, round-the-clock electronic agent, the authors monitored popular online business-to-consumer auction sites. They found that bidders fell into three broad categories: evaluators (one-time high bidders), participators (active in the bidding process), and opportunists (bargain hunters). As a group, evaluators fared the worst, generating greater revenues for the auctioneers. Hence, to maximize their revenues, auctioneers need to attract evaluators to their sites. The way to do this, surprisingly, is by having a large bid increment. Of all possibilities considered, the bid increment was found to be the one factor that had the highest impact on revenue: the higher the increment, the higher the revenue. Although counterintuitive, the authors seem to imply that this is explained by a greater percentage of evaluators in the auction at the larger bid increment. This recommendation does come with caution. Although a large bid increment leads to a higher percentage of evaluators, it also deters people from bidding, so the total number of people participating in the auction is reduced. Hence, auction designers need to perform a balancing act.

This paper presents surprising results, based on what seems to be rigorous analysis.