Internet Auctions: An Overview
Whether you're looking for a collectible or thinking about selling an antique, an Internet auction may be just the place for you.
Since they began in 1995, Internet auctions have become perhaps the hottest phenomenon on the Web. They offer buyers a "virtual" flea market from which to choose an endless array of merchandise from around the world, and they provide sellers a worldwide storefront from which to market their goods.
But online auctions can be risky business, according to the Federal Trade Commission (FTC), a federal agency that works to prevent fraud, deception and unfair practices in the marketplace. Among the thousands of consumer fraud complaints the FTC receives yearly, those dealing with online auction fraud consistently rank at or near the top of the list. The complaints generally deal with late shipments, no shipments, or shipments of products that aren't the same quality as advertised; bogus online payment or escrow services; and fraudulent dealers who lure bidders from legitimate auction sites with seemingly better deals. Most complaints involve sellers, but in some cases, the buyers are the focus.
Whether you're a buyer or a seller, understanding how Internet auctions work can help you avoid these problems.
Internet auctions are online bazaars. Some are the scenes of business-to-person activity, where a Web site operator physically controls the merchandise for sale and accepts payment for the goods. But most specialize in person-to-person activity where individual sellers or small businesses auction their items directly to consumers. In these auctions, the seller — not the site — has the merchandise.
The person-to-person sites require sellers to register and obtain a "user account name" (or "screen name") before they can place items for bid. Sellers also must agree to pay a fee every time they conduct an auction.
Many sellers set a time limit on bidding and, in some cases, a "reserve price" — the lowest price they will accept for an item. When the bidding closes at the scheduled time, the highest bidder "wins." If no one bids at or above the reserve price, the auction closes without a "winner."
At the end of a successful person-to-person auction, the buyer and seller communicate — usually by email — to arrange for payment and delivery.
Successful bidders usually pay by credit card, debit card, personal check, cashier's check, money order, or cash on delivery. Credit cards may offer buyers the best protection in that they allow buyers to seek a credit from the credit card issuer (also known as a "charge back") if the product isn't delivered or isn't what they ordered. Typically, sellers on business-to-person auction sites accept credit card payments. In contrast, most sellers in person-to-person auctions require a cashier's check or money order before they send an item.
In many cases, an online payment service or an escrow service is used to facilitate payment.
Online Payment Services
Online payment services are popular with both buyers and sellers. They allow buyers to use a credit card or electronic bank transfer to pay sellers who may not be set up to accept credit card or electronic bank transactions. They also may protect buyers from unlawful use of their credit cards or bank accounts because the online payment service, not the seller, holds the account information. Many sellers prefer online payment services because payment services tend to provide more security than, say, personal checks.
In online payment services, both the buyer and seller set up accounts that allow them to make or accept payments. Buyers provide payment information, such as bank account or credit card numbers, and sellers give information about where payments should be deposited.
To complete a transaction, the buyer tells the online payment service to direct appropriate funds to the seller. The seller then has immediate access to the funds, minus any service fee.
Online Escrow Services
Online escrow services operate differently. Their primary purpose is to protect buyers and sellers from fraud. Escrow services accept and hold payment from the buyer — often a wire transfer via check, money order or credit card — until the buyer receives and approves the merchandise. Only then do they forward the payment to the seller. The buyer pays the fee for an online escrow service — generally a percentage of the cost of the item. Online escrow services usually are used for big-ticket items, like computers, cars or jewelry.
Types of Fraud
Most people who complain to the FTC about Internet auction fraud report problems with sellers who:
- fail to send the merchandise
- send something of lesser value than advertised
- fail to deliver in a timely manner
- fail to disclose all relevant information about a product or terms of the sale.
But some buyers experience other problems, including:
- "bid siphoning," when con artists lure bidders off legitimate auction sites by offering to sell the "same" item at a lower price. Their intent is to trick consumers into sending money without proffering the item. By going off-site, buyers lose any protections the original site may provide, such as insurance, feedback forms or guarantees.
- "shill bidding," when fraudulent sellers or their "shills" bid on sellers' items to drive up the price.
- "bid shielding," when fraudulent buyers submit very high bids to discourage other bidders from competing for the same item and then retract those bids so that people they know can get the item at a lower price.
Another type of fraud occurs when sellers or buyers pose as escrow services to improperly obtain money or goods. The so-called seller puts goods up for sale on an Internet auction and insists that prospective buyers use a particular escrow service. Once buyers provide the escrow service with their payment information, the escrow service doesn't hold the payment: The payment goes directly to the so-called seller. The buyer never receives the promised goods, can't locate the seller, and, because the escrow service was part of the scheme, can't get any money back.
In some cases, a fraudster poses as a buyer and, after placing the winning bid on an item, insists that the seller use a particular escrow service. The escrow service tricks the seller into sending the merchandise and doesn't send the payment or return the goods to the seller.
For Buyers and Sellers...
Where to Turn for Help
If you have problems during a transaction, try to work them out directly with the seller, buyer or site operator. If that doesn't work, file a complaint with:
- the attorney general's office in your state.
- your county or state consumer protection agency. Check the blue pages of the phone book under county and state government.
- the Better Business Bureau.
the FTC. File a complaint online at www.ftc.gov or call toll-free 1-877-FTC-HELP (1-877-382-4357).
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