Chapter 9 Dynamic Pricing: Auctions and More

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Chapter 9Dynamic PricingAuctions and More
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Learning Objectives

• Define the various types of auctions and list
  their characteristics
• Describe the process of conducting forward and
  reverse auctions
• Describe the benefits and limitations of auctions
• Describe the various services that support
  auctions
• Describe the hazards of e-auction fraud and
  countermeasures
• Describe bartering and negotiating
• Analyze future directions and the role of
  m-commerce

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Electronic Auctions in Action

• Illustrative examples
• C2B reverse auctions DMS
• B2C and C2C forward auctions Dell Computers
• C2C forward auctions all of us at eBay

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Figure 9-1A Dell Product in an Auction
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Fundamentals of Dynamic Pricing and Auctions

• Fundamentals
• Traditional auctions
• Last only a few minutes (short decision making
  time) and sellers may not get highest price
• Bidders may not get what they want
• Electronic auctions
• Like offline auctions, performed on PC
• Host sites act like brokers
• Buyers may solicit offers from potential sellers

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Fundamentals

• Dynamic pricing refers to a commerce transaction
  in which prices are not fixed
• Forms of dynamic pricing
• Negotiation
• Bargaining
• Four major configurations depending upon how many
  buyers and sellers are involved
• One buyer, one seller
• One buyer, many potential buyers
• One seller, one buyer
• One seller, many potential buyers

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Figure 9-2Types of Dynamic Pricing
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Fundamentals

• Dynamic pricing and auctions (cont.)
• English auctions (sequentially one item at a time)

Dynamic
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Figure 9-3English Auction, Ascending Price
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Fundamentals (cont.)

• Dynamic pricing and auctions (cont.)
• Yankee auctionsmultiple identical items with a
  minimum bid
• Dutch auctionsmultiple identical items starting
  at high price and moving lower

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Figure 9-4Computerized Auction Clockfor Dutch
Flower Auctions
Source Used with permission of
aquarius-flora.com.
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Fundamentals (cont.)

• Dynamic pricing and auctions (cont.)
• Free fall (declining price) auction
• One item auctioned at a time
• Price starts high and is reduced at fixed time
  intervals
• One buyer, many potential sellers
• Many sellers, many buyers

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Fundamentals (cont.)

• Dynamic pricing and auctions (cont.)
• Sealed-bid first-price auctionsilent auction,
  only one bid item goes to highest bidder
• Sealed-bid second-price auctionitem awarded to
  highest bidder, but at second bid (Vickrey
  auction)

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Benefits

• Benefits to sellers
• Increase revenues by broadening customer base and
  shortening cycle time
• Optimal price setting
• Disintermediationsellers gain more customer
  dollars by offering items directly
• Better customer relationshipsbuyers and sellers
  have more time to interact, creating customer
  loyalty
• Liquidationsellers liquidate large quantities of
  obsolete items very quickly

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Benefits (cont.)

• Benefits to buyers
• Opportunities to find unique items and
  collectibles
• Chance to bargainbuyers can bid with seller for
  desired prices
• Entertainmentinteraction in auction can be
  entertaining and exciting
• Anonymity3rd party allows buyer anonymity
• Conveniencebuyers trade from anywhere (even cell
  phone)

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Benefits (cont.)

• Benefits to auctioneers
• Higher repeat purchaseauction sites garner
  higher repeat-purchase rates than e-commerce B2C
  sites
• More sticky Web site (tendency of customers to
  stay at site longer and come back more often)
• Expansion of auction businessManheim Auctions
• Sell program cars as response to Japanese efforts
  to penetrate U.S. car auction business
• 80,000 car dealers involved
• Provide services to customers

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Limitations

• Security
• C2C auctions not necessarily secure
• B2B auctions conducted on highly secure private
  lines
• Software
• Few off-the-shelf packages that can handle
  auctions
• Best practices still being defined

• Possibility of fraud
• May purchase a defective product buying sight
  unseen
• Fraud rate is very high
• Limited participation
• Invitation only
• Open to dealers only

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Economic Impacts

• Strategic uses of auctions and pricing mechanisms
• Customers are attracted to e-auction markets
  because they provide greater liquidity than
  traditional ones
• Efficient way to find best price at electronic
  auctions
• Low cost provision of exceptional levels of
  transparency of market to operation and product
  quality

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Economic Impacts (cont.)

• Strategic uses of auctions and pricing mechanisms
  (cont.)
• E-auction markets are more efficient than
  traditional markets
• E-auctions can provide services at low
  transaction cost
• Customers abandon a market that is not perceived
  as fair
• Must manage all aspects of trading activities
  from initiation to settlement and delivery

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Economic Impacts (cont.)

• Strategic uses of auctions and pricing mechanisms
  (cont.)
• E-auction system must manage all aspect of
  trading activity
• Delay in price response causes greater potential
  for feedback loops and instabilities
• Order-driven e-auction markets demand that
  markets clearly define when a sale has been made

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Economic Impacts (cont.)

• Impacts
• Auctions as a coordination mechanismestablish
  equilibrium in price
• Auctions as a social mechanism to determine a
  price
• Offer special items at a single time
• Attract considerable attention
• Auctions provide exposure of purchase and sale
  ordersliquidity

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Economic Impacts (cont.)

• Auctions as a highly visible distribution
  mechanism
• Deals with special offers
• Use the mechanism to attract customers
• Bargain hunters
• Have preference for gambling dimension of auction
  process
• Auction as a component in e-commerce

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Figure 9-6The Components of Auctions
Source Modified from Klein (1997), p. 4.
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Name-Your-Own-Price C2B Model

• Priceline model (priceline.com)
• Enables consumers to achieve significant savings
  by naming their own price for goods and services
  (C2B)
• Presents consumer offers to sellers who can fill
  the demandif no success, customer ups the bid
  (type of reverse auction)
• Priceline uses its database of vendors minimum
  prices to match supply against requests
• C2B reverse auctionvendors submit offers and
  lowest-priced vendor gets the job

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Name-Your-Own-PriceC2B Model (cont.)

• Other models
• Savvio.commodel for travelers
• Real-time declining-price auction
• Full disclosure of itinerary details
• Discounted international and domestic air travel
  and cruise tickets
• Asiatravel.com allows travelers to place an RFQ,
  then asks vendors to bid on it

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Auction Process and Software Support

• Phase 1 Searching and comparing auctions and
  their prices
• Mega-searching and comparisons
• AuctionWatch.comdirectory of auction sites
• Internetauctionlist.comnews about e-auctions and
  specialty auctions worldwide
• Yahoo!s auction list400 auction-related links
• Bidders Edgesearches eBay, Yahoo, Amazon for
  specific items
• Turbobidprovides mega-search series that helps
  local bidders find items from a pool of
• e-action sites

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Auction Process andSoftware Support (cont.)

• Automated search services
• Notify buyers when items they are interested in
  are available
• Buyers complete a simple form about the item
• Browsing site categories
• Directory of categories for buyers to
  browsenarrows their search
• May allow sorts by times auctions are held
• DBasic and advanced searching
• Buyers use search engines to look for a single
  term, multiple terms, key words
• Advanced search requires a form to be filled out

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Auction Process andSoftware Support (cont.)

• Phase 2 Getting started at an auction
• Registration and profiling
• Sellers and buyers register before entering the
  auction
• Names
• User Ids
• Passwords
• Buyers can check sellers profile
• Listing and promoting

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Auction Process andSoftware Support (cont.)

• Advertising wizardhelps users create attractive
  ads and auction postings
• Auction assistanthelps create attractive auction
  listings
• Auction eposter98makes it simple to add
  pictures, program interacts with eBay

• Auction wizardauction-posting tool that saves
  cutting and pasting when uploading items for sale
• Mister Lister on eBay allows sellers to upload
  many items at a time
• Bulk Loaderseller can load several auctions into
  spreadsheet programs

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Auction Process andSoftware Support (cont.)

• Pricing
• To post an item for bidding, sellers must decide
  on
• Minimum bid amount
• Bid increment
• Reserve price (lowest price seller is willing to
  accept)
• Search past auctions and the transacted prices to
  provide a benchmark for buyers bidding strategy

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Auction Process andSoftware Support (cont.)

• Phase 3 The actual bidding
• Bid watching and multiple biddings
• Buyers visit the user page of an
• e-auction Web site at any time to check status
  of an auction
• They can review bids and auctions
• Tools provided in the U.S. to view bids across
  several auction sites
• BidWatch
• Bid Monitor
• EasyScreen Layout

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Auction Process andSoftware Support (cont.)

• Auto-snippingthe act of entering a bid during
  the very last seconds of an auction and
  outbidding the highest bidder

• E-proxy biddingsoftware system bids on behalf of
  the buyers
• Buyer determines the maximum bid
• Place first bid manually
• Proxy executes the bids keeping bids as low as
  possible

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Auction Process andSoftware Support (cont.)

• Phase 4 Post-auction follow-up
• Post auction notifications
• Bidding notifications
• End-of-auction notices
• Seller notices
• Postcards and thank-you notes
• User communication
• Chat groups
• Mailing lists
• Message boards
• Feedback and rating

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Auction Process andSoftware Support (cont.)

• Phase 4 Post-auction follow-up (cont.)
• Pricing and billing
• Payment methods
• Electronic transfer service
• Escrow service
• Credit-card payment
• Shipping and postage
• Internet shippers
• Internet postage

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Figure 9-7The Process of E-Auctions
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Auction Process andSoftware Support (cont.)
Additional terms and rules

• Reverse price auctionlowest price a seller is
  willing to accept
• Vertical auctionspecialized auctions know as
  auction vortals
• Used in B2B
• Many auction sites specialize in one area

• Bid retraction
• Cancellation of a bid by a bidder, used only in
  special circumstances
• Bids are usually considered to be binding
• Featured auctions
• Extra exposure when listed on Web sites
• Sellers pay extra for this service

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Auctions on Private Networks

• Pigs in Singapore and Taiwan
• Conducted on private networks more than 10 years
• Forward auction of pigs that are brought to a
  physical site while data is displayed to bidders
• Computers monitor bidders financial capability

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Auctions on Private Networks (cont.)

• Cars in Japans Aucnet
• Auctioned used cars to dealers on television
• Moved to private network, then on to Internet and
  into the U.S. but closed in 1998
• Today in Japan these auctions sell
• Computer hardware
• Software
• Services like insurance and leasing
• Livestock in Australiaelectronic online system
  for trading cattle and sheep

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Double Auctions, Bundle Trading, and Pricing
Issues

• Double auctions
• Single auction
• Item is offered for sale with multiple buyers
  making bids on the item
• Multiple sellers make offers to sell an item
• Double auction
• Multiple units of a product may be auctioned off
  at the same time
• Buyers and sellers can make bids during trading
  periods
• Prices in double auctionsmultiple buyers and
  sellers

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Double Auctions, Bundle Trading,and Pricing
Issues (cont.)

• Bundle tradingpersonalization and customization
  of products and services
• Collection of complementary goods and services
  (e.g., airline tickets, hotel reservations,
  rental cars)
• Simplified, efficient alternative solution to
  purchasing from multiple sellers
• Management and operation of bundle markets is
  complex and differs considerably from single or
  double auction markets

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Double Auctions, Bundle Trading, and Pricing
Issues (cont.)

• Prices in auctions higher or lower?
• Prices tend to be higher when there is only one
  seller
• Auctioneer has a better position to maximize
  revenues
• Prices are lower in cases of liquidation
• Sellers objective is to sell as quickly as
  possible

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Double Auctions, Bundle Trading, and Pricing
Issues (cont.)

• Pricing strategies in online auctions
• Both sellers and buyers may develop strategies
  for auctions
• Sellers have option to use different mechanisms
• Buyers need to develop strategy regarding
  increases in bids and when to stop bidding

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Fraud in Auctions and Its Prevention

• Types of e-auction fraud
• Bid shieldingthe use of phantom bidders to bid
  at a very high price when an auction begins
• Shillingsellers arrange to have fake bids placed
  on their items to artificially jack up prices
• Fake photos and misleading descriptionssellers
  distort items (e.g., borrowing images, ambiguous
  descriptions)
• Improper grading techniquesdescription of the
  condition of an item may be interpreted
  differently between seller and buyer

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Fraud in Auctions and Its Prevention (cont.)

• Selling reproductions
• High shipping cost and handling feesselling a
  reproduction described as an original
• Failure to ship merchandisemoney is paid out but
  merchandise never arrives
• Loss and damage claimsbuyers claim they never
  received an item or received it in damaged
  condition, request a refund
• Switch and returnseller accepts a return, but
  receives broken or mangled objects

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Fraud in Auctions and Its Prevention (cont.)

• Protecting against e-auction fraud
• User identity verificationvoluntary program
  encourages users to supply eBay with information
  for online verificationqualifies them for
  highest level of verification
• Authentication servicedetermines whether an item
  is genuine and described appropriately
• Grading servicesdetermines physical condition of
  an item
• Feedback forumprovides users with ability to
  comment on their experiences with other
  individuals

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Fraud in Auctions and Its Prevention (cont.)

• Insurance policyeBay offers insurance
  underwritten by Lloyds of London at no cost to
  eBay users
• Escrow servicesitems valued at more than 200,
  eBay recommends escrow services (for a fee)
• Non-payment punishment1st-time nonpayment
  warning, 4th offense is cause for suspension from
  auction

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Fraud in Auctions and Its Prevention (cont.)

• Appraisal servicesuse a variety of methods to
  appraise items
• Assessment of authenticity and condition
• Review of what comparable items have sold for in
  recent months
• Verificationsa way of confirming the identity
  and evaluating the condition of an item

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Bartering Online

• Barteringexchange of goods and services
• Bartering exchanges
• Give your offer to intermediary
• Intermediary asses value of your product or
  service inpoints
• Use points to buy what you need
• Bartering sites must be financially secure
• Alternative to bartering is to auction surplus
  and then use the money collected to buy items
  needed

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Negotiating and Bargaining Online

• Dynamic prices can be determined by negotiation
• Negotiated prices result from interactions and
  bargaining among sellers and buyers
• Expensive items like cars and real estate
• Deal with nonpricing terms like payment method
  and credit

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Negotiating and Bargaining Online

• Three factors that facilitate negotiated prices
• Intelligent agents that perform searches and
  comparisons
• Computer technology that facilitates negotiation
  process
• Products and services that are bundled and
  customized

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Negotiating and Bargaining Online (cont.)

• Technologies for bargaining
• Searchgathering information about products,
  services, potential vendors and customers
• Selectionprocessing and filtering information in
  order to select a product and trading partner
• Negotiationinteractions with bids, offers,
  agreements, and contracts
• Continuing selection and negotiationrepeated
  sequentially until an agreement is reached
• Transaction completionpayment and delivery

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Mobile Auctions

• Benefits of online auctions
• Convenience and ubiquity
• Simpler and faster
• Privacy
• Limitations of online auctions
• Visual quality
• Memory capacity
• Security

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Future of Auctions

• General auctionsface regular problems of selling
  online in international environment
• Selling art online in real-time auctionsallows
  real-time auction bidding and partners with eBay
• Strategic alliancesmajor impact on competition
  and industry structure

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Managerial Issues

• Your own auction site vs. a third-party site
• Cost benefit analysis
• Auction strategies
• Support services
• Payment

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Managerial Issues (cont.)

• Controlling what is auctioned
• Change agent
• Building auction applications
• Bartering
• Building auction sites

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Figure 9-9Components of a Comprehensive Auction
Site
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Figure 9-10Integrated Auction Business Model