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How online auctions work

PC World

July 14, 2000
Web posted at: 8:43 a.m. EDT (1243 GMT)


In this story:

An Auction's Backbone

An Auction in Every Pot

The Future of Online Auctions

RELATED STORIES, SITES icon



(IDG) -- Want to buy a Planet of the Apes lunchbox or sell your King Kong finger puppet? What used to be found only at garage sales or in classified ads can now be put up for sale at dozens of online auction houses. Similarly, retailers are using the auction format to offload excess inventory and other services. But it's technology that makes all of this work: Behind the flurry of buying and selling, computers are furiously tracking bids and counterbids and determining the winner.

Here's what you need to know:

  • Online auctions rely on relational database applications to store and track users, items, and bids.
  • Most auction sites use automatic bidding agents that match your bid to the highest bid (up to a preset limit), sparing you from checking the site constantly.
  • Escrow services facilitate transactions between buyers and sellers at some sites--but fraud is still a big issue in online auctions.

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On the surface, an online auction is similar to a traditional auction. You bid against others for an item. At the end of the auction, a winner is declared and that person buys the item for the amount agreed upon during the process.

Of course, the online process differs from the in-person experience. To begin, you register at a site so it can keep track of items you bid on and items you sell. When you enter an auction to place a bid, the site's computers determine the amount you need to bid in order to become the highest bidder. You can accept this amount or enter your own bid. For every additional bid that is placed, the computers orchestrating the auction again compare your bid against the current bids and determine if your bid is the winner.

An Auction's Backbone

Behind the scenes, a relational database keeps track of items, bids, and, most importantly, winners. For the most part, online auction databases are constructed of three relational tables: the user registration table, which contains all user-related information; the item listings table, which includes the item, description, and lot number; and the transaction table, where each bid record is stored. These tables are linked by related fields and constantly work together to track bids on an item.

For instance, a bid record will contain the user ID from the user registration table, the lot number from the item listings table, the bid amount, and the date and time stamp. The computers continuously analyze the bid records to determine the highest bidder. When the auction ends, a winner is declared and notifications are sent out to the buyer and seller. And then the process starts all over again for the next item.

So that you don't have to baby-sit your auction, many sites employ a piece of software known as a proxy bidder, which automatically places bids on your behalf. To use the proxy bidder, you designate the maximum amount you wish to spend on an item. Then, each time a bid is placed that is higher than yours, the proxy bidder kicks into action and places a bid for you. It will only increase your bid amount by as much as is necessary to top the current bid, and will not exceed the maximum amount unless directed by you to do so.

An Auction in Every Pot

Online auctions are all the rage these days, but they aren't just a fad. A recent report by Forrester Research predicts that the online bidding community will reach 14 million users and generate $19 billion in sales by 2003. More sites add auctions every day: While EBay might be the most well known, portals such as Yahoo and Lycos have joined in as well. Even staid Sotheby's has gone digital.

While many different types of auctions can be found online, two are the most common: person to person (or P2P) and business to consumer (or B2C). Person-to-person auctions, such as EBay, Lycos Auctions, and Auctions.com, facilitate the trading of items between individuals. Items up for auction at P2P sites could range from used appliances to fine arts and antiques.

Business-to-consumer auctions, also known as merchant sites, include sites such as Onsale.com and UBid.com. B2C sites enable retailers to offload products at reduced prices to interested buyers. Buyers like the fact that they get to bid for brand name--and in some cases, brand new--items from reputable companies, rather than relying on the kindness of strangers. Specialty auction sites, such as Collecting Nation and Pottery Auction, may deal only in specific collectibles.

You'll also find reverse, or dutch, auctions at sites such as UBid.com. Reverse auctions are usually adopted when a seller has multiple (and identical) items up for bid. In such a case, the lowest successful bid price is accepted, and all winning bidders will pay that price. For instance, say a site is offering 100 notebook PCs for bid. Bidder A bids $1000 each for 90 PCs, Bidder B bids $900 each for 5, and Bidder C bids $1200 each for 10. The auction ends and Bidders A and C get their requested quantity for $1000 each.

The Future of Online Auctions

Once the deal is done, the buyer needs to get the product and the seller needs to get paid. Unfortunately, fraud is one of the biggest risks of buying and selling online. To help combat this problem, online escrow services are jumping into the fray. These services generally take the buyer's payment, hold it in a safe place, and release payment to the seller only after the buyer has received and approved goods.

Current services include I-Escrow and Escrow.com. But you need to be careful which escrow service you choose, since some services aren't licensed or regulated. (See "Who's Holding Your Money?" for more information.) Other payment methods, including PayPal and Billpoint, basically take the place of the credit-card swipe machine, allowing users (usually at the P2P sites) to pay by credit card online.

Analysts predict that more sites will employ agents to work on your behalf to find the best auction deals around. Agents might alert you when an item comes up for auction, or an applet might feed up-to-the-minute auction prices to your PC or to a wireless device such as your mobile phone or pager. And, in an effort to mimic the thrill of real-life auctions, you can also expect to see more live auctions broadcast via the Net.




RELATED STORIES:
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July 13, 2000
7 ways to be an online-auction champ
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Will online escrow services protect you from auction scammers?
May 16, 2000
California surplus items up for bid on eBay
April 28, 2000
Opinion: The trouble with online auctions and gambling
March 16, 2000
Businesses take to eBay
March 2, 2000

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RELATED SITES:
Sotheby's
EBay
Auctions.com
PayPal
Escrow.com.

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