Five forces analysis applied to the online auction industry.

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The online auction industry offers marketplaces where buyer and seller meet to trade various products. Advantages of online auctions are: a wide community, broad product range, lower search and transaction costs and, compared to fixed price, a lower price. Therefore, a win-win situation is created, with benefits for buyers, like making a good deal and the auction feeling, and benefits for the sellers, like obtaining a good market price and being able to sell dispensable inventory. Some auction sites list a broad range of products on their site, and other specialize on niche products. Apart from that, the industry can be divided into three segments: Business-to-Business, Business-to-Consumer and Person-to-Person (Consumer-to-Consumer), with either businesses or consumers as market participants. Online auctions are one of the few profitable E-Business Models, and make up nearly 10% of all revenues created in E-Commerce.

Five forces analysis applied to the online auction industry

. Threat of entry

In the industry, there are various barriers:

- Capital requirements: Only some hardware (Server etc.) and a software packet are needed, as well as human capital to run an online-auction. In comparison to other industries, overall ramp-up costs are relatively low and no inventory is required.

- Economies of scale exist: Within a certain range of users, there are fixed costs, but only very few variable costs. For example, two servers and a program adjusted for 1000 users, may also fit 10000 users, so there are declining costs per unit. Because the fixed costs are low, economies of scale are not a relevant barrier to enter the online-auction industry.

- Product differentiation: Image is important to establish trust, confidence and customer loyalty; these elements are essential for online auctions. Special services, like warranties offered by uBid, and measures to foster community spirit, like special sites that attract a certain community, help to acquire new users and to keep actual users.

- Switching costs: are high, because sellers who gain reputation at certain online-auction sites cannot transfer this to other sites. If customers would switch from a provider with a huge community to one with a small community, disadvantages caused by smaller audiences, bidding and selling, appear. The result would be a smaller product variety and fewer buyers that can bid for an offer.

- Learning curve: In order to communicate with the user community and react to their needs, online-auction specific techniques, like online marketing, can be used. The market leader eBay for example, constantly analyses their customer base to be able offer services according to their needs. Certainly, the huge amount of users frequenting eBay's site makes it easier to draw conclusions on the services wanted.

- Community: An online-auction needs a critical mass of buyers and sellers to be attractive. The membership-loop is an example of network externalities, the bigger the community, the more advantage customers gain from an online-auction: buyers only go to a site if they can expect a certain amount of offers, and sellers only go there if a sufficient number of buyers will bid for their products.

Entering the online auction market is relatively easy as low start up capital is required. On the other hand network externalities play an important role in the industry. To be successful in the long run it is crucial to build up a critical mass of customers. Customers face high switching costs as they are not able to transfer the reputation gained among one community to a different community. Thus, new entrants face difficulties in attracting new customers.

Customer loyalty, company image and community building have to established over time and can not be achieved immediately.

To sum up entry barriers are high, thus new potential entrants are not a viable threat to the incumbents.

2. Bargaining power of buyers

Buyer concentration differs over the industry segments. In the B2B segment, buyer concentration is high compared to C2C and B2C. With over 40 million customers in the latter two markets, the buyer group is very fragmented and each single customer does not have the power to negotiate on fees.

The Internet is a very transparent market that enables customers to select a provider with optimal price-performance ratio. As it is very easy in the Internet to switch from one service-provider to another, providers have to increase switching costs artificially, for example building up a system to measure reputation of customers.

Due to the high entry barriers, the risk of backward integration of customers does not exist.

Conclusion

At least in the C2C sector buyers have low bargaining power.

3. Bargaining power of suppliers

Main suppliers of the online-auction industry are companies providing network infrastructure such as servers. Server and other hardware suppliers are operating in an oligopolistic market with undifferentiated products and therefore switching costs are low. To establish the network and web pages IT specialists can be hired or outsourcing partners such as site hosting companies can provide services. Highly qualified personnel are rare thus bargaining power can be exercised by high salary demands.
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The threat of forward integration is low as entry barriers into online-auctioning are relatively high.

Apart from selective cases of high salary demanding IT specialists, the overall bargaining power of suppliers is low.

4. Pressure from substitute products

Online:

Online retailers like Otto, power shopping agencies, online advertising

Offline:

Adds in newspapers, flea markets, garage sales, traditional auction houses, liquidators, companies offering catalogue selling

Each of these services can substitute only parts of the services provided by online auctioning, depending on the customer segment and the product demanded. ...

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