Auctions and Dynamic Pricing Unit 8-1 Managing the Digital Enterprise By Professor Michael Rappa

No where perhaps is the impact of the web more evident than in the case of auctions. By now everyone has heard of eBay, the pioneer in person-to-person online trading. Founded in 1995 by Pierre Omidyar, the company now provides millions of auctions, and hundreds of thousands of new items every day from which bidders may choose. eBay is the most famous of the auction web sites, but already it has more than 1,500 rivals. The market for consumer-only auctions was projected to grow to 17.5 million users and $15.5 billion in revenues in 2001. Business-to-business and business-to-consumer auctions are also projected to grow and will likely prove to be a bigger market.

In the future, auctions will have a profound effect on many aspects of business on the web, from product pricing to supplier contracting to inventory liquidation. Auctions use the market mechanism to solve a difficult business problem: pricing. Setting prices can be tricky, as product managers well know, especially when it comes to new product releases. Price the product too high and inventories mount; under price what the market is willing to pay and shortages occur and money is left on the table. Finding the right balance can take time, and indeed, one can continue to miss the mark as the market shifts and competition evolves. With an auction, there is no guess work: the market sets the price (above some minimum). Auction-based pricing is sometimes referred to as "dynamic" or "fluid" pricing, in contrast to set or static pricing mechanisms.

To appreciate the full potential of the auction, one must recognize the many possible permutations this model can assume -- especially on the web. The commonly used auctions are the open-cry (or English) auction, the sealed bid auction, and the Dutch auction. However, there are a number of dimensions that can be varied in an auction to yield subtle but important differences in the process and outcome.