Online Auctions: There Can Be Only One

Abstract

In recent years, the proliferation of the world wide web has lead toan increase in the number of public auctions on the internet. One ofthe characteristics of online auctions is that a successfulimplementation requires a high volume of buyers and sellers at itswebsite. Consequently, auction sites which have a high volume oftraffic have an advantage over those in which the volume is limited.This results in even greater polarization of buyers and sellerstowards a particular site. This is often referred to as the``network effect'' in a variety of web and telecommunicationapplications involving interactions among a large number ofentities. While this effect has qualitatively been known toincrease the value of the overall network, its effect has never beenmodeled or studied rigorously. In this paper, we construct a MarkovModel to analyze the network effect in the case of web auctions. Weshow that the network effect is very powerful for the case of webauctions and can result in a situation in which one auction canquickly overwhelm its competing sites. This results in a situationin which the natural stable equilibrium is that of a single onlineauction seller for a given product and geographical locality. Whilea single player structure is unlikely because of some approximationassumptions in the model, the trend seems to show the likelyexistence of single dominant player in the web auction space.