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 aggregating huge buyer audiences. Consumers, merchants, and society derive a number of economic benefits from participating in Internet auctions.

Benefits include: liquidity (sellers find willing buyers and vice versa, anywhere in the world); price discovery (buyers and sellers develop prices for rare or hard-to-assess items); price transparency (everyone can see asking and bidding prices); market efficiency (auctions often reduce prices and increase consumer welfare); lower transaction costs; consumer aggregation (sellers benefit from large motivated audiences); and network effects (the larger an auction site becomes, the more valuable it is for everyone).

However, there are a number of risks and costs. For consumers: delayed consumption costs (auctions can go on for days, plus shipping); 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).

Merchants face considerable risks too: they may sell goods for prices far below conventional market prices, face nonpayment, false bidding, bid rigging, monitoring costs, transaction fees charged by the auction site, credit card processing fees, and the administrative costs of entering price and product information.