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.

Auction Rules
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.

 

Payment Options
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.