How Online Auctions Work

Learn the Basics of Internet Auctions

Internet Auction Key on Keyboard
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Online auctions offer buyers and sellers of a wide variety of goods an enormous platform for trade. They offer buyers a virtual flea market, with an endless range of merchandise from around the world, and they give sellers a storefront from which to market everything from sports memorabilia to computer systems to millions of international buyers. This includes national retailers auctioning off excess inventory or services.

But how to online auctions work?

How Online Auctions Work

Internet auctions are like giant online flea markets. Sellers may offer one item at a time or multiple lots of the same item. In theory, online auctions run much like local auctions, but behind the scenes, there is ongoing data collection. Just like local auctions, there are sellers and bidders and winners and losers. Winners are expected to pay for what they bid on at the conclusion of the auction. But that is where the similarities between online and local auctions end.

Registration for Online Auction Sites

At online auctions, you will be required to register before you can buy or sell an item(s). Registration is required to track items you bid on or sell, keep up with the bids, determine the winning bids and build a database on seller and bidder feedback. Setting up an online email account separate from your main email account is recommended to help you track the progress of the auction and prevent spam from coming into your main account.

Winning Bids

The bidding for each auction closes at the scheduled time. In the case of sales of multiple lots, the participants with the highest bids at the close of the auction are obligated to buy the items. If no one bids at or above the reserve price, the auction closes without a winner. At the close of a successful auction, the buyer and seller communicate, usually by email, to arrange for payment and delivery of the goods.

Kinds of Internet Auctions

There are two types of Internet auctions: business-to-person or person-to-person. Sellers of business-to-person auction sites have physical control of the merchandise being offered and accept payment for the goods. In person-to-person auctions, individual sellers or small businesses offer their items for auction directly to consumers. Generally, the seller, not the site, has physical possession of the merchandise. After the auction closes, the seller is responsible for dealing directly with the highest bidder to arrange for payment and delivery.

Payment Options

Buyers may have several payment options depending upon the auction platform, including credit card, debit card, personal check, cashier's check, money order, cash on delivery and escrow services. However, all sellers and platforms do not accept all forms of payment.

Credit cards offer buyers the most consumer protections, including the right to seek a credit from the credit card issuer if the product is not delivered or if the product received is not the product ordered.

Typically, sellers using business-to-person auction sites accept payment by credit card. But many sellers in person-to-person auctions do not. Usually, they require payment by cashier's check or money order before they send the item to the winning bidder.

Escrow Services

Some sellers agree to use an escrow service. For a fee, generally 5 percent of the cost of the item paid by the buyer, an escrow service accepts payment from the buyer via check, money order or credit card. The service releases the money to the seller only after the buyer receives and approves the merchandise. This helps protect buyers from ending up empty-handed after paying their money. Using an escrow service can delay the deal. As with any business transaction, investigate the escrow service's reputation before signing on to the service.

Consumer Concerns

According to the Federal Trade Commission, Internet auction fraud has become a significant problem. Most consumer complaints center on sellers who:

  • Do not deliver the advertised goods.
  • Deliver something far less valuable than they advertised.
  • Do not deliver in a timely way.
  • Fail to disclose all the relevant information about the product or terms of the sale.

If you run into a problem try to work it out directly with the buyer or seller or with the auction website. If that does not work, file a complaint with the Federal Trade Commission by calling toll-free 1-877-FTC-HELP (382-4357) or visiting the FTC's website. Although the Commission cannot resolve individual problems for consumers, it can act against a company if it sees a pattern of possible law violations. You also may want to contact your state Attorney General or your local consumer protection office.

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