1 Prentice Hall, 2002 Dynamic Pricing: Auctions (modifications by Judith Molka-Danielsen)

2 Prentice Hall, 2002 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 (unsure bidders do not bid) Bidders may not get what they want (no time to examine the goods) Physical presence of bidders, item, intermediaries often required. Electronic auctions Like offline auctions, performed on PC Host sites act like brokers (intermediary) Buyers may solicit offers from potential sellers More potential bidders

3 Prentice Hall, 2002 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

4 Prentice Hall, 2002 Figure 9-2 Types of Dynamic Pricing

5 Prentice Hall, 2002 Fundamentals Dynamic pricing and auctions (cont.) English auctions (sequentially one item at a time) Miniumum bid - specifies lowest sell price Can have other criteria besides price (payment date) Usually one winner Can take days on the Internet, minutes if live

6 Prentice Hall, 2002 Figure 9-3 English Auction, Ascending Price

7 Prentice Hall, 2002 Fundamentals (cont.) Dynamic pricing and auctions (cont.) Yankee auctions—multiple identical items with a minimum bid Winner pays the winning bid (highest price) Can be used in reverse auctions (buyer controlled auction) Dutch auctions—multiple identical items starting at high price and moving lower Bidders specify price and quantity Multiple winners pay same price, can be lower than what you bid (but higher bids get priority)

8 Prentice Hall, 2002 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 (Reverse Auction or tendering system) One buyer, many potential sellers. The buyer creates an RFQ (Request for Quote) (Double Auctions) Many sellers, many buyers. Stocks and commodities markets.

9 Prentice Hall, 2002 Fundamentals (cont.) Dynamic pricing and auctions (cont.) Sealed-bid first-price auction — silent auction, only one bid; item goes to highest bidder Sealed-bid second-price auction — item awarded to highest bidder, but at highest second bid, also one bid, silent. Also called a (Vickrey auction). It encourages bidding true value.

10 Prentice Hall, 2002 Benefits Benefits to sellers: Increase revenues: more potential bidders and shorter cycle times. Optimal price setting (get best price for buyers and sellers) Disintermediation — More money goes to the sellers instead of those running the auctions (they do less). Sellers post auctions themselves. Buyers and sellers – can have more contact and interaction, builds loyalty Liquidation — easier for sellers trying to be rid of large quantities of obsolete items very quickly

11 Prentice Hall, 2002 Benefits (cont.) Benefits to buyers: Opportunities to find unique items and collectibles Chance to bargain — buyers can bid with seller for desired prices (price matches value) Entertainment — interaction in auction can be entertaining and exciting Anonymity—3 rd party allows buyer anonymity Convenience — buyers trade from anywhere (Cell phone – Call-ins are also allowed more often in traditional auctions)

12 Prentice Hall, 2002 Benefits (cont.) Benefits to auctioneers: Higher repeat purchase rates — higher than on B2C sites More “sticky” Web site (tendency of customers to stay at site longer and come back more often) Expansion of auction business—Manheim 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

13 Prentice Hall, 2002 Limitations Possibility of fraud May purchase a defective product buying sight unseen Fraud rate is very high (false seller ratings) Limited participation Invitation only Open to dealers only Security C2C auctions not necessarily secure (no 3rd party) B2B auctions conducted on highly secure private lines Software Few off-the-shelf packages that can handle auctions “Best practices” still being defined

14 Prentice Hall, greater liquidity 2.Efficient way to find best price 3.At Low cost can hide market operations and offer product quality 4.Discovery used elsewhere: E-auctions can find information required to price goods traded in traditional marketplace. 5.E-auctions can provide services at lower transaction cost, all other things equal 6.Customers abandon a market perceived as unfair (Trust in e- markets because buyers can be closer to the seller.) 7.Manage all from initiation to settlement and delivery. 8.Delay in price response causes faster posting times: result in feedback loops and instabilities: disrupt orderly trading 9.Different speed links can fuel unfair trading (delays) 10.Order-driven e-auction markets say that markets must clearly define when a sale has been made Lessons of Auctions

15 Prentice Hall, 2002 Economic Impacts (cont.) Impacts Auctions as a coordination mechanism— to establish equilibrium in price (telecom bandwidth) Auctions as a social mechanism to determine a price Offer special items, rare, at a single time Attract considerable attention (telecom spectrum) Auctions as a highly visibility distribution mechanism Deals with special offers (airline seats) Use the mechanism to attract customers (get attention of bargain hunters) Auction as a component in e-commerce

16 Prentice Hall, 2002 Auction Process and Software Support Phase 1: Searching and comparing auctions and their prices Mega-searching and comparisons AuctionWatch.com—directory of auction sites Internetauctionlist.com—news about e- auctions and specialty auctions worldwide

17 Prentice Hall, 2002 Auction Process and Software 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 browse—narrows 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

18 Prentice Hall, 2002 Auction Process and Software Support (cont.) Phase 2: Getting started at an auction Registration and profiling Sellers and buyers register before entering the auction Buyers can check seller’s profile Listing and promoting 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 buyer’s bidding strategy

19 Prentice Hall, 2002 Auction Process and Software Support (cont.) Advertising wizard— helps users create attractive ads and auction postings Auction assistant—helps create attractive auction listings Auction eposter98— makes it simple to add pictures, program interacts with eBay Auction wizard—auction- 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 Loader—seller can load several auctions into spreadsheet programs

20 Prentice Hall, 2002 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 Auction Process and Software Support (cont.)

21 Prentice Hall, 2002 Auction Process and Software Support (cont.) Auto-snipping–the act of entering a bid during the very last seconds of an auction and outbidding the highest bidder E-proxy bidding— software 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

22 Prentice Hall, 2002 Auction Process and Software 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 Pricing and billing Payment methods (transfer, escrow, credit cards) Internet Shipping and postage

23 Prentice Hall, 2002 Auction Process and Software Support (cont.) Reverse price auction— lowest price a seller is willing to accept Vertical auction— specialized 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 Additional terms and rules

24 Prentice Hall, 2002 Auctions on Private Networks Pigs in Singapore and Taiwan (10 years) Forward auction of pigs that are brought to a physical site while data is displayed to bidders Computers monitor bidder’s financial capability Cars on Japan’s Aucnet moved to private network, then on to Internet and into the U.S. but closed in 1998 Livestock in Australia—electronic online system for trading cattle and sheep

25 Prentice Hall, 2002 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 auctions—multiple buyers and sellers Double Auctions and Pricing Issues

26 Prentice Hall, 2002 Double Auctions and Pricing Issues (cont.) P rices 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 Seller’s objective is to sell as quickly as possible

27 Prentice Hall, 2002 Double Auctions 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

28 Prentice Hall, 2002 Fraud in Auctions and Its Prevention Types of e-auction fraud Bid shielding—the use of phantom bidders to bid at a very high price when an auction begins Shilling—sellers arrange to have fake bids placed on their items to artificially jack up prices Fake photos and misleading descriptions—sellers distort items (e.g., borrowing images, ambiguous descriptions) Improper grading techniques—description of the condition of an item may be interpreted differently between seller and buyer

29 Prentice Hall, 2002 Fraud in Auctions and Its Prevention (cont.) Selling reproductions High shipping cost and handling fees—selling a reproduction described as an original Failure to ship merchandise—money is paid out but merchandise never arrives Loss and damage claims—buyers claim they never received an item or received it in damaged condition, request a refund Switch and return—seller accepts a return, but receives broken or mangled objects

30 Prentice Hall, 2002 Protecting against e-auction fraud User identity verification—voluntary program encourages users to supply eBay with information for online verification—qualifies them for highest level of verification Authentication service—determines whether an item is genuine and described appropriately Grading services—determines physical condition of an item Feedback forum—provides users with ability to comment on their experiences with other individuals Fraud in Auctions and Its Prevention (cont.)

31 Prentice Hall, 2002 Fraud in Auctions and Its Prevention (cont.) Insurance policy—eBay offers insurance underwritten by Lloyd’s of London at no cost to eBay users Escrow services—items valued at more than $200, eBay recommends escrow services (for a fee) Non-payment punishment—1 st -time nonpayment warning, 4 th offense is cause for suspension from auction

32 Prentice Hall, 2002 Fraud in Auctions and Its Prevention (cont.) Appraisal services—use a variety of methods to appraise items Assessment of authenticity and condition Review of what comparable items have sold for in recent months Verifications—a way of confirming the identity and evaluating the condition of an item

33 Prentice Hall, 2002 Figure 9-9 Components of a Comprehensive Auction Site