Benefits and cost of online auction

The Internet is primarily responsible for the resurgence in auctions because it provides a global environment and very low fixed and operational costs for the aggregation of huge buyer audiences. Benefits include liquidity (sellers find willing buyers, and buyers find sellers, anywhere in the world); price discovery (developing prices for rare items); price transparency (public asking and bidding prices); market efficiency (reduced prices, increased consumer welfare); lower transaction costs; consumer aggregation; and network effects (larger sites are more valuable for everyone).

However, there are a number of risks and costs. For consumers: delayed consumption costs (auctions can go on for days, plus shipping time); monitoring costs (participation requires time to monitor bidding); equipment costs (a computer and Internet access); trust risks (auctions are a significant source of Internet fraud); and fulfilment costs (the buyer typically pays packing, shipping, and insurance).

Auction sites such as eBay have taken steps to reduce consumer participation costs and trust risk. For instance, rating systems let previous customers rate sellers, and the 'Buy It Now' button lets consumers reduce monitoring costs by paying a premium price — the difference between Buy It Now and the auction price is the cost of monitoring.

Merchants face considerable risks and costs as well. At auctions, merchants may sell goods for prices far below what they might have achieved in conventional markets. Merchants also face risks of nonpayment, false bidding, bid rigging, monitoring, transaction fees charged by the auction site, credit card processing fees, and the administration costs of entering price and product information.