Subject: How an On-line Auction Works
Overview of Lesson Plan: In this lesson, students are introduced to the on-line auction concept and review two of the most popular on-line auction business models.
- Learn what fixed pricing and dynamic pricing mean and understand the difference between the two.
- Examine two of the most popular on-line auction models.
- Open-Cry Auction
- Reverse Auction
- Explore two of the most heavily used auction websites.
- Identify the key stages of the on-line auction process.
- Review the legal and security issues that must be addressed in any on-line auction business model.
- Introduce class to the on-line auction capabilities of the ScoresUp.com website.
Prior to beginning this lesson plan, prepare by reviewing the information found at the following URLs.
http://www.priceline.com - Review the "How Priceline Works" page and also practice using the site by going through the process of placing a bid for an airline ticket from the airport nearest you to Miami, FL. Make sure you stop short of submitting an actual bid.
http://www.ebay.com - Visit eBay. Use the search engine to find an auction on an item you yourself might be interested in buying. Go to that auction to see how the product is displayed and described and how the bids are presented. While at eBay go to the Safe Harbor area of the site to familiarize yourself with all of the resources eBay has in place to protect users of their site from becoming victims of fraud.
www.zdnet.com/anchordesk/stories/story/0,10738,2621386,00.html - Read this article describing different types of on-line auction fraud and what you can do to avoid becoming a victim.
http://www.scoresup.com/Yourtown - Familiarize yourself with every aspect of the On-Line Auction demo site provided at ScoresUp.com. Doing so will give you a very clear perception of how each and every feature of this area of the site can be used by your class. This will make it much easier to explain the site to your class.
Note: The websites listed throughout the curriculum are merely suggestions. Please substitute or complement the provided websites, as you feel appropriate.
SP011 - "Online Auction Business Plan"
SP028 - "12 Steps to An Online Auction"
- Begin class by asking students what store they like to shop in most. When a few have given answers, follow up by asking the last student what he/she purchased the last time he/she made a purchase at his/her favorite store. Then ask same student what would have happened if when checking the item out the student told the cashier that instead of paying the ticketed price for the item, he/she was only willing to pay $10 less. The cashier, of course, would tell the student that in order to purchase the product the ticketed price would have to be paid.
Explain that the pricing system used at all retail stores is the fixed price system. In a fixed price business model, the seller establishes the sales price of the product and the customer decides if they are willing to pay that price for the product.
Next, explain that the fixed pricing system is a relatively new phenomenon. Point out to your students that since the beginning of modern civilization, customers have shopped in markets with no fixed pricing. People who needed something traded for it. As money was introduced to the marketplace, customers would negotiate purchase prices with sellers and this buyer seller haggling over prices continues today in many non-US marketplaces. Next, ask students to name a popular market used by millions of Americans, today, in which the customer establishes the sales price of the product.
If one of your students does not quickly come up with the answers eBay or Priceline, you can do so. Explain that either site is an example of an on-line auction, at which the buyers decide how much they are willing to pay for the products. Auction-based pricing is also called dynamic pricing because it changes so quickly with each purchase.
- Point out to your class that in 2001, it was reported that there were over 1,500 websites conducting some form of on-line auction. Two of the most popular on-line auction formats are:
- Open-Cry Auction - These sites conduct auctions on behalf of sellers and charge the seller a fee that is usually based on the value of the winning bid. In order to purchase a product at one of these sites, customers must make the highest bid during the pre-established bidding period. Of all the sites using the Open-Cry format, eBay is by far the most popular and commercially successful.
- Reverse Auction - Instead of seeking the highest bid for a product, this auction format seeks the highest price each bidder is willing to pay for a product or service. In order to purchase a product at one of these sites, the customer must bid an amount that equals or exceeds the lowest price the seller is willing to accept. Often referred to as the name-your-price business model, or demand collection, it works best with items that are in the higher price categories, such as automobiles and airline tickets. Priceline.com is an example of a Reverse Auction business model.
- Take your class to http://www.priceline.com and be sure to point out the limited selection of product and service categories available at the site. Next, select the "How Priceline Works" option and read through the information with your class.
You want to make sure your students understand that sellers at Priceline establish a minimum price they are willing to accept. Bidders do not know what that price is. Instead of competing with each other to bid the highest price for an item, bidders at Priceline attempt to submit the lowest possible bid they think the seller will accept for an item. If their first bid is rejected, they can then submit higher bids should they choose to do so. If the initial bid is accepted, Priceline bidders have no way of knowing if they could have purchased the item for an even lower price. The key to customer satisfaction at Priceline.com is being able to purchase an item for an amount less than you would pay for the same item in the open marketplace. For example, if you call an airline and find out it cost $200 for a roundtrip ticket to Miami and then you are able to purchase roundtrip airfare for $150 through Priceline, you'll be satisfied.
Explain to your students that Priceline's software is designed to motivate the bidder to accept more flexible purchasing conditions. Take your class back to the Priceline homepage and select the Airline Tickets category. Take them through a fictional ticket bid scenario to illustrate how the software gets bidders to accept more flexible terms.
Before leaving Priceline explain that sellers use the site to help them sell bloated inventories. As an example, explain that most hotels know roughly about how many rooms they will not be able to fill at normal room rates, on any given day of the year. Instead of leaving those rooms empty or lowering all their rates in an attempt to fill just a few empty ones, the Hotel establishes a minimum price they are willing to accept for those rooms and makes them available to Priceline. Because Priceline does not publicly advertise the seller's minimum price, the hotel does not have to worry that all of its other customers will demand a similar rate. And often times, when you purchase something at Priceline, the seller will warn you that terms of the purchase may be restricted. For example, the Hotel will tell all customers who obtained their room via Priceline that they are not entitled to the breakfast buffet.
End the Priceline tour by explaining that Priceline makes money by charging the seller a fee for listing and selling products.
- Go to www.ebay.com and ask your class if any of them have ever used the site. Ask any student who has used eBay to describe the purpose of the site. What you want the class to understand about eBay is that it provides people who want to sell things and people who want to buy things with an electronic marketplace. Ask the class the following questions about the eBay site:
Why do people who want to sell something use eBay?
Look for answers like:
- There are a lot of buyers at eBay
- Buyers can be from anywhere in the world
- eBay's search engine makes it easy for potential buyers to find a seller's product
- eBay's policies and rules help protect the seller from fraud
Why do people who want to buy something use eBay?
Look for answers like:
- There are a lot of things to buy at eBay
- eBay's search engine makes it easy for potential buyers to find the product they are shopping for
- eBay's auction format helps buyers find competitive prices
- eBay's policies and rules help protect the buyer from fraud
How does this site make money?
eBay makes money by charging sellers, who successfully sell their product at the site, a fee. eBay also charges for several specialized services available at their site, including the rental of electronic storefronts to sellers with many saleable items, and an on-line bill payment service that facilitates credit card transactions between eBay buyers and sellers. eBay also generates revenue by selling advertising space at their site.
How does this site identify its visitors?
In order to bid, buy, or sell a product at eBay, you must become a registered user. When you do, you tell eBay who you are and how you can be contacted.
Before leaving the site, explain to your students that eBay was one of the first e-Commerce websites to generate a profit, over $11 million, as early as 1996. Point out that one of the biggest reason's that eBay's Auction Business Model is a success is because eBay does not have to produce, purchase, or ship the products sold at the site.
- Outline the key stages of the on-line auction process
- Initial buyer and seller registration - In this stage, sellers are solicited, identified, and information describing who they are, is placed at the site so that bidders understand who they are doing business with. Also in this stage, a bidder registration system is put in place that provides a way to identify the bidder and verify the bidder's contact information. Be sure to emphasize that unlike live auctions where bidders, sellers, and items being auctioned are all physically present in the same location, the success of web-based auctions is dependant upon how much trust bidders and sellers have in each other. This is why eBay devotes so much effort to providing users of their site with rules, safeguards, and transaction histories.
- Setting up the Auction - In this stage, the items being auctioned are described with both words and photos. Since bidders cannot see or touch the actual item, the words and photos used to describe it are critical to achieving the highest possible bids. Also in this stage, auction rules are established that explain how the auction will be conducted, starting and ending times and dates, how a winning bid will be selected, additional charges buyer or seller will be responsible for, how buyer will physically receive the product, terms of payment, etc.
- Scheduling and advertising - Explain to your students that the timing of auctions can be critical to their success. For example, auctioning two tickets to a football game taking place two years from now would result in much lower bids than auctioning those same tickets one month before the actual game. When scheduling auctions it is important to include enough time to effectively advertise the auction in the markets where potential bidders are located.
- Bidding - In this stage bids are made and processed and the bid control rules of the auction are implemented. For example, if a minimum bid has been established, bids made below that amount are discarded. The auction software keeps track of the bidding, posting the highest bid, and notifying auction participants when a new high bid has been received.
- Closing of Auction - At this stage, the bidding ends, the auction terminates, and winners and losers are notified of the results.
- Transaction Settlement - In this final stage, seller receives payment from buyer, buyer receives item from seller, and the auction company receives payment for auction services.
- Emphasize to the class that fraud is one of the biggest challenges faced by companies in the on-line auction business. This includes fraud by sellers of items, by bidders, and by the eventual winning bidders. There have been numerous cases of on-line auction-related fraud in which winning bidders have sent payment and received something of less value than expected or received nothing at all. Auctions have ended only to discover that the winning bid came from a fictitious source. Sellers have sent items to winning bidders and received no payment or bad checks in return. Have your students read an articleat zdnet.com describing how to avoid becoming a victim of on-line auction fraud. This story can be viewed at:
Fraud is easier to accomplish in the on-line environment because the seller and buyer do not meet face-to-face and there is usually no easy way for bidders to physically inspect the product they are bidding on.
In response to this major concern, e-Bay has developed numerous features and services designed to help users of their service avoid becoming involved in fraudulent transactions. Have your students review the Rules & Safety Overview area of the eBay website to get a clearer perception of the fraud and security problems associated with on-line auctions and the massive investment eBay is making in attempts to control it. You'll find this information at:
- Introduce your class to the on-line Auction area of the ScoresUp.com website. Go to the sample site set up at:
Explain to the class that as a project, they will be conducting their own on-line auction. They will first find an organization in your school who wants to raise money. They will work with that organization to find a business, group, or individual to provide an item that can be auctioned. The class will then set up the ScoresUp site for the auction, advertise and promote the event, and conduct the auction.
At your next session you will develop a complete business plan for the auction-based business activities to be conducted by your class.
Ask students to meet with family and/or friends to brainstorm and develop a list of candidate items that if auctioned within your specific community would draw a lot of publicity and a lot of bidders.
Ask students to develop a list of school and community groups who have conducted fundraisers in the past who would be interested in sponsoring an on-line auction for your class.
Have students read SP011 - "Online Auction Business Plan" and SP028 - "12 Steps to An Online Auction"