Online Auctions: There can be only one

Abstract

In recent years, the proliferation of the world wide web has lead to an increase in the number of public auctions on the internet. One of the characteristics of online auctions is that a successful implementation requires a high volume of buyers and sellers at its website. Consequently, auction sites which have a high volume of traffic have an advantage over those in which the volume is limited. This results in even greater polarization of buyers and sellers towards a particular site. This is often referred to as the "network effect" in a variety of web and telecommunication applications involving interactions among a large number of entities. While this effect has qualitatively been known to increase the value of the overall network, its effect has never been modeled or studied rigorously. In this paper, we construct a Markov Model to analyze the network effect in the case of web auctions. We show that the network effect is very powerful for the case of web auctions and can result in a situation in which one auction can quickly overwhelm its competing sites. This results in a situation in which the natural stable equilibrium is that of a single online auction seller for a given product and geographical locality. While a single player structure is unlikely because of some approximation assumptions in the model, the trend seems to show the likely existence of single dominant player in the web auction space. © 2009 IEEE.