Everybody loves auction methods for selling things because they seem to offer accurate pricing. But the more I think about it, the less impressed I am by auctions. Sure, auctions may help arrive at a more accurate price than other methods, but the question is how much more accurate? At best, auction pricing can only be marginally more accurate than other forms of price setting. As software gets better at price optimization, this edge will become even thinner. Because people are enamored by auctions, people think they can solve problems that they can't actually solve, which is something I've written about a couple of times over at Techdirt.
That being said, eBay has clearly made quite the killing as an auction platform, and the company's business model will forever be seen as groundbreaking. But perhaps it's worth revisiting some of our assumptions about the company. Is it actually their auction system that makes the site what it is, or is it the fact that it's a marketplace where far-flung buyers and sellers and trade goods in a manner that prior to its inception had never been created before. In other words, instead of thinking about eBay as an electronic auction house, try think of it as the world's biggest flea market with everything under the sun. That in itself was/is a revolution. And I've noticed that more and more sales are getting racked up through its "Buy it Now" feature, which is not something that you typically see at Sotheby's.
But I do think that the auction system plays a very important role in eBay's business: it's what makes the site fun to use. Buying things on eBay feels like playing a game. Heck, eBay bidders are even known to buy software that purports to give them an edge. Because of the auction system, people can feel like they snagged a great price, even if they didn't. Of course, auctions have always been about fun. Which would you rather go to? An estate sale, or a barn sale with a fast-talking auctioneer? Which is more fun, seeing art at the museum, or at an expensive art auction, where rich people wave cards and drop millions on some oil on canvas? Obviously it's the latter in both cases.
So while the power of auctions may be overstated as a way to arrive at a perfect price, they're pretty great as an enaging mechanism to bring buyers and sellers together.