The growing popularity of the Internet and digital communications has led more consumers to experience online auctions. According to iResearch Consulting Group, a Shanghai-based market research company for the Internet industry, about 12 million Chinese conducted auctions online in 2004 and a third of them, or 4 million, reported successful experiences. Two years later, that 12 million has grown to more than 30 million – and the number keeps rising. At the same time, the efficiency of online auctions has also attracted more scrutiny.


“The biggest shortcoming of online auctions is information mismatch,” says Zhou Lian, one of four scholars at Beijing University who recently wrote a paper titled, “The Value of Reputation: Evidence from Online Auctions.” The other scholars include Zhang Weiying, Gu Quanlin and Shen Yi. “Due to a lack of legal protection in China, a seller is often uncertain about a buyer’s ability to pay, while a buyer often worries that the seller won’t deliver the goods or that they are not as [high-quality] as described,” says Zhou.


Given those concerns, he adds, the majority of the auction sites in China have put in place a ratings system that encompasses all the comments made by users of those sites about their individual experiences. In addition, a “credibility score” generated by the system is given to each user. Has this system proved effective? Will an improvement in a seller’s credibility increase a deal’s chances of success? And are there any other factors that contribute to the success rate of auctions?


The authors use data provided by Eachnet, a Chinese online auction company with the biggest market share in China before being acquired by eBay in 2003, on online auctions conducted between December 1, 2002 and March 31, 2003, and analyze the various factors that contribute to a successful deal.


Sellers’ Credibility


According to Zhou, Eachnet’s data include information on nearly 70,000 buyers and sellers in millions of transactions. The scholars set up a model encompassing both so-called dummy variables – such as the quality of the goods – and attributive variables, such as seller’s gender and credibility score. Their conclusion: The higher a seller’s credibility score, the more likely the deal will be successful. However, credibility scores have no significant impact on the prices.


The researchers suggest that this is because of the competitive nature of online auctions. “For every product, there is often more than one seller, giving rise to competition,” they write. “Say there are two sellers competing for buyers on the same product. The potential buyers naturally would weigh which seller is more trustworthy than others before making a bid. Predictably, the sellers with higher credibility scores will attract more bids and thereby boast greater chances of success.” But the final price has more to do with the buyers’ bids than a seller’s credibility, the scholars note.


Sellers’ credibility is not the only reason for an online auction to be successful. Interestingly, the researchers say, if a seller and a buyer happen to be in the same city, they are more likely to see their deal go through. “After all, you must have the goods delivered. So if both parties live in the same city, the delivery can be much more reliable while costs could be much lower,” according to the paper.


Most auction sites allow sellers to choose whether to establish the so-called reservation price, which should be no less than the initial bidding price. A bid would have to reach the reservation price for a transaction to succeed. The scholars find that the lower the initial bidding price relative to the reservation price, the less likely an auction will succeed.


The reason? Because the auction sites generally don’t show what the reservation price is, and only show whether any bids have reached that price, says Zhou. As a result, bidders could get frustrated if their offering prices keep failing to reach the reserved level, and they would likely turn to auction sites that don’t set reservation prices.


In addition, the newer the auctioned goods are, the more likely the auctions will succeed. Timing is important as well. The scholars’ research shows that the period between 7 p.m. and 10 p.m. is the best time to conduct online auctions. “Most Chinese work from 9 a.m. to 5 p.m. and have 7 p.m. to 10 p.m. as their spare time,” the paper notes. In addition, given that the majority of the auction sites in China charge sellers based on the duration of each auction and the final prices, it’s also important for the sellers to set auction times, the paper adds.


Newcomers’ Disadvantage


Finally, the research shows that the credit-scoring system promoted by Eachnet does a good job of differentiating sellers for potential buyers. At the same time, however, there are also problems associated with such a system. For instance, the scholars say, “a seller has to rack up an auction history to be able to generate a good score. So that puts newcomers in a natural disadvantage over the veterans.” Meanwhile, “there is a lack of consistency among the scoring systems at different sites, making it difficult to compare and transfer credit scores.”


In addition, the article points out, it’s difficult to verify whether a seller achieved his or her credit score based on false information or not. “The risks involve a seller using fraudulent information to get a better score and entice potential buyers. As a result, the credit-scoring system has to have safeguards in place to protect its reliability.”