Proceedings of the 34th Hawaii International Conference on System Sciences - 2001
A Framework for the Evaluation of an Electronic Marketplace Design with
Evolutionary Negotiation Support
Sungwon Cho
University of Hawaii at Manoa
1645 Dole St. #204
Honolulu, HI 96822
sungwonc@hawaii.edu
Abstract
With the aid of information technology, electronic
marketplaces have multiplied. Currently, however, most
electronic marketplaces support only limited negotiation
functions using a one-dimensional variable of price. The
purpose of this study is to show how online
multidimensional auction systems can be used to facilitate
electronic trading in business-to-business electronic
marketplaces.
In this paper, we first evaluate the existing electronic
marketplaces. Based on this evaluation, the functional
requirements for a buyer-centric electronic marketplace are
presented. Then, we propose a new multidimensional
auction model with evolutionary negotiation support
(MAMENS) to be used in the electronic marketplace.
Finally, the evaluation framework for the MAMENS is
discussed.
Keywords: Electronic marketplaces; Multidimensional
auctions; Multi-attribute auction; Evaluation
1. Introduction
As a consequence of the Internet’s phenomenal growth,
innumerable, daily online business activities are occurring,
all as part of an emerging field called as Electronic
Commerce (EC). EC’s potential can be compared to a
volcanic eruption in its awesome power and its laying of
rich and fertile groundwork for significant future business
transactions. An electronic marketplace is a special kind of
EC that serves as an intermediary over which multiple
buyers and sellers conduct business [6].
Internet auction sites are good examples of emerging
electronic marketplaces. These sites have become
increasingly popular for the entertaining experience of
“dynamic pricing”. The number of Internet auction sites
continues to grow at a rapid pace. Although early sites
focused on providing marketplaces for transactions in rare
goods or second-hand goods between individuals, the true
potential strength of such electronic marketplaces lies in
Business-to-Business transactions. According to recent
market research, consumer and business auctions will
account for 29% of all EC, or $129 billion, by 2002,
increased from $3.8 billion at the end of 1998 [8].
Currently, however, most electronic marketplaces
support only limited negotiation functions using the onedimensional variable of price. Although this simplistic
approach may help in price discovery for standardized
goods, it leaves little room for negotiations for other
attributes of products/services. Consequently, despite rapid
automation of the other phases of transactions,
negotiations are still done using face-to-face meetings or
traditional communication technology such as phones,
causing extra overhead costs.
In this paper, we propose buyer-centric electronic
marketplaces with evolutionary negotiation supports. The
function requirements will be discussed along with a
conceptual model for proposing electronic marketplaces.
However, the most important contribution of this paper is
introducing the new Multidimensional Auction Model with
Evolutionary Negotiation Support (MAMENS). The paper
will show how MAMENS can be used to support
negotiations.
In the following section, we will discuss the phase
model of market transactions followed by an evaluation of
current electronic marketplaces. Based on the evaluation,
functional requirements for buyer-centric electronic
marketplaces are presented. Then, we introduce
MAMENS. Finally, the evaluation framework for the
MAMENS is discussed.
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Proceedings of the 34th Hawaii International Conference on System Sciences - 2001
2. Phase model of electronic marketplaces
Electronic marketplaces offer a place for buyers and
sellers to meet and perform transactions. The narrow
definition of electronic marketplace is “an interorganizational information system that allows the
participating buyers and sellers in some markets to
exchange information about prices and product offerings [
1, p.1676] . ” However, a broader definition of electronic
marketplace includes all the activities that support
transactions. A number of studies explore the role of
electronic marketplaces [2, 4, 6, 10, 15, 16]. Although each
study presents a slightly different view, the following
phase model of market transactions is generally used to
classify the role of electronic marketplaces [2, 15, 16].
• Information phase
• Negotiation phase
• Settlement phase
• Other service (Trust, dispute resolution,
insurance, rules and regulation)
Information phase
The fundamental role of electronic marketplaces in this
phase is to provide a matchmaking service between buyers
and sellers including order matching and trading partner
matching. The matchmaking service includes several subfunctions. First, buyers and sellers access and collect
information concerning potential trading partners as well
as goods and/or services (e.g., specification, price, etc. ). A
buyer compares specification and price of the wanted
goods/services. Then the buyer determines who to buy
from. High transparency and low search costs for this
information make electronic marketplaces particularly
promising in this phase [1].
Negotiation phase
Once a buyer determines what to buy and who to buy
from, both trade partners need to agree on terms and
conditions for the transaction. In a fixed pricing scheme, or
simple auction services, this phase is often skipped. A
conventional auction is a special kind of negotiation
support tool that only considers price as a single factor.
However, it is often the case, especially in Business-to
Business trading, that we need to take into consideration
multiple attributes in a transaction.
payment must be transferred to the seller and the goods
sold must be transferred to the buyer. Electronic
marketplaces need to make sure that the goods and
payment are transferred to the appropriate party based on
the agreement.
Other service
Some functions are not directly linked to a transaction,
but are highly desirable in order for an electronic
marketplace to serve as a intermediary. The most
important issue that may occur during the settlement phase
is how to build trust. Electronic marketplaces need to
maintain a high level of trust among buyers and sellers by
preventing fraud. In addition, the electronic marketplaces
need to support a means of dispute resolution in case one
of the parties makes a claim.
3. Evaluation of current electronic
marketplaces
There are many electronic marketplaces and each
provides a different range of functionality. Some support
just auctions and the others support a much broader range
of business activities. In order to compare electronic
marketplaces, we identified eight evaluation criteria based
on the above mentioned phase model. Table 1 shows the
evaluation criteria for electronic marketplaces.
To identify a broad spectrum of evaluation criteria, this
study used the ABI inform online search database which is
a widely used database in the business area. The study
selected electronic marketplaces or Internet auction sites
that were mentioned in trade magazines or academic
journals during the time period of Jan.1999 to Dec. 1999.
They were mainly mentioned for either their popularity,
potential impact on industry, and/or unique features. Some
examples of the evaluation results are shown in table 2.
< Table 1. Evaluation criteria for electronic
marketplaces >
Phase model of market
transaction
Information
Negotiation
Settlement phase
The final phase of a transaction is the settlement phase.
The settlement phase comprises ensuring payment and
delivery of goods. After the transaction is agreed upon,
Settlement
Other service
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Evaluation criteria
Type of goods traded
Target market
Specification of products
Type of negotiation
Type of auction mechanism
Negotiation support
Settlement support
Trust enhancing mechanism
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Proceedings of the 34th Hawaii International Conference on System Sciences - 2001
< Table 2. Example of evaluation of existing electronic marketplaces >
Electronic
marketplaces
Type of
goods
traded
Ebay
(http://www.e
bay.com)
Books,
movies,
music,
etc.
Books,
movies,
music,
etc.
Airline
tickets,
etc.
Yahoo
(http://auctions
.yahoo.com/)
Priceline.com
(http://www.pr
iceline.com/)
Targe
t
marke
t
C2C
Specif
icatio
n
Negotiation type
Seller
Buyer
Seller
1
C2C
or
B2C
Seller
B2C
Type
Employed
auction
mechanism
Negotiation
support
N
Aucti
on
English,
Dutch, etc.
Proxy bidding
1
N
Aucti
on
English,
Dutch, etc.
Buyer
N
1
Aucti
on
Reverse
auction
English
auction
Rbuy
(http://www.R
buy.com/)
Real
estate
Any
Seller
1
N
Aucti
on
FastParts
(http://www.fa
stparts.com/)
Electronic
componen
ts and
equipeme
nt
B2B
Seller
1
N
Aucti
on
ExpertsExchan
ge
(http://www.e
xpertsexchange.com/
)
Frictionless.co
m
(http://www.fr
ictionless.com/
)
Knowledg
e
C2C
or
B2C
Buyer
N
1
Aucti
on
Reverse
auction
based on
rating
N/A
(Decision
support
software )
B2B
Buyer
N
1
Match
makin
g
N/A
3.1 Type of goods traded
One of the classifying factors for electronic
marketplaces is the type of goods traded. Traditional
economic theory points out that the type of goods is an
important factor in the trading scenario. Therefore, many
traditional auction services were established for trading
specific type of goods such as perishables (e.g., produce),
and rare or second-hand goods that are characterized by
the limited market and difficulty in assessing an
appropriate price. In fact, early Internet auction sites
gained popularity by providing marketplaces for those kind
of goods. However, today’s auction items are not limited
to a few categories. Currently, a wide range of goods are
traded through Internet auction sites.
Theoretically, an auction is suitable for trading
standardized items (e.g., stock), which do not require a
complex ontology to describe so that the negotiation
Settlement
support
Trust enhancing
mechanism
e-mail req.
Rating,
reputation.
Payment is
made by the
buyer to
Price.com
User ID and
valid credit card
rating and
feedback
Credit card
payment in
advance with
no setback
allowed
A computerized
negotiation
program that helps
bridge the
differences.
Payment is
made by the
buyer to
FastParts.com,
then the
payment is
released to the
seller.
Token transfer
Pre-qualified
members only.
Buyers have a 5
business day
quarantine
period
Expert
registration.
If the buyer does
not find the match
form pool of
products, he can
turn his
preferences into a
reverse auction
efforts can be focused on price. More recently, Internet
auction sites received publicity as a potential marketplace
for trading intangible goods such as expertise and
intellectual property (e.g., expertexchange.com ). Such
sites use social ratings or reputation mechanisms as the
means of evaluating quality for these intangible goods.
3.2 Target Market
This article found three types of target markets:
business-to-business (B2B), business-to-consumer (B2C),
and consumer-to-consumer (C2C). Although there are no
typical products for different target markets, we found that
electronic components, industrial parts, and surplus assets
are traded in B2B; and smaller and less expensive products
like books, movies, music, and art are traded through C2C
or B2C. Computers, software, and travel packages are
traded in B2C systems. The recent trend is that many
marketplaces originally targeted for C2C are migrating
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into B2C with the involvement of small businesses which
want to sell their products with little marketing effort.
3.3 Specification of products
As for the specification of goods, the most important
thing is the issue of ontology [3, 4]. Since different users
may specify the same item in different ways, it is very
difficult to create a standardized set of attributes for the
same product. Product description is a problem not only in
the matchmaking process but in the settlement process. For
example, malicious users can intentionally avoid
specifying inferior features if there is no standard set of
attributes. This is often the case in classified ads in
newspaper. Having a standardized set of specifications will
also help buyers/sellers access multiple electronic
marketplaces simultaneously, using agent technology.
Product specification is also an important issue for
using a multidimensional auction. Without the agreed upon
set of attributes, cooperative negotiations are not feasible.
There are two possibilities for solving this problem: One
approach is to force the user to follow a pre-defined set of
specifications according to the type of products (e.g.
Personallogic.com). This way we can standardize product
description. However, it is impractical to identify the
necessary dimensions of all goods. The other approach is
to leave product description to either the sellers or buyers
who initiate the trade. In this case, we do not have
standardized product descriptions, but we have more
flexibility.
3.4 Negotiation type
Previous research used the number of participants as a
major dimension of classifying EC [3, 12]. Even before
Internet auctions became popular, this kind of taxonomy
was widely used in the NSS research area (e.g. bilateral vs.
multilateral). Table 3 shows the taxonomy of negotiation
type based on the number of participants. The majority of
auction services fall into the category of 1:N whereas
mediated matching services fall into N:N.
< Table 3. Taxonomy of negotiation types based on
the number of participants >
Seller/ buyer
One
Many
One
Bargaining
Reverse auction
Many
Auction
Mediated transaction
3.5 Type of auction mechanism
Since auctions provide an efficient way for price
determination, many electronic marketplaces have been
built based on the auction mechanism. However, there are
varieties of auction mechanisms and each has its own
strengths and weaknesses. Most seller-centric electronic
marketplaces (i.e., B2C, or C2C) provide a variety of
auction mechanisms including English, Dutch, and
multiple-unit uniform price auctions [12]. On the other
hand, buyer-centric electronic marketplaces (B2C, B2B)
mainly use the reverse auction mechanism. The reverse
auction mechanism is a familiar form to government or
corporate purchasing departments. For more information
on auction mechanisms, see [12].
3.6 Negotiation support
Few electronic marketplaces provide negotiation
support for other than price. Some Internet auction services
(e.g., Rbuy ) provide negotiation support to help both
trading partners reach a consensus. However, the
algorithms used in these automatic negotiations are too
simple to be widely used in real transactions. On the other
hand, a few of the other Internet auction services (e.g.,
eBay) provide a “proxy bidding” service which
automatically increases bidding until the bidding price
reaches users’ willing-to-pay price. Although this proxy
bidding may relieve users from the burden of constantly
monitoring the bidding process, it is too primitive to be
considered a negotiation support.
The more promising method of providing negotiation
support is by using a multidimensional auction
mechanism. Only a few electronic marketplaces employ
multidimensional
auction
mechanisms
(e.g.,
Frictionless.com). These electronic marketplaces aim to
find optimal goods and partners based on the user’s
preference not only on price, but also on other variables
such as quantity and shipping option.
3.7 Settlement support
A final and important role of electronic marketplaces is
to ensure that the transaction is completed satisfactorily.
To do this, they need to provide a banking service, confirm
payment is settled, and resolve disputes among the trading
partners. In fact, one of the major complaints from Internet
auction services has been buyers’ non-payment for goods
received. This paper found a number of Internet auction
services attempting to solve the problem. For example,
Priceline.com has a unique feature to ensure payment.
When both parties have agreed to the price and terms,
Priceline.com (as opposed to the buyer) pays the bill using
credit card information which the buyer registered before
the transaction began. In this way, an intermediary ensures
the transaction is completed, as soon as agreement is
reached. Non-payment is not possible, as a credit reversal
would be a separate transaction.
On the other hand, few electronic marketplaces provide
direct shipping service. Most electronic marketplaces let
trade partners use a third party carrier. This strategy, i.e.
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letting them handle the shipping process by themselves,
sometimes works for smaller transactions, but in many
B2B transactions, shipping is such an important issue that
the electronic marketplaces need to include this feature.
3.8 Trust enhancing mechanism
Maintaining trust is another important role of electronic
marketplaces. The trust issues arise from the lack of
opportunity for physical product inspection. The most
common way of increasing trust is to require identification
such as an email account from buyers and/or sellers.
However, using email as an ID has a significant limitation
considering the growing number of web-based free email
services. Some Internet auction sites provide user profiles.
As we can easily guess, brand name products sell more
than those of lesser well-known companies. The other
popular approach is to require credit card information.
Credit cards are one of the most popular means of payment
in EC because of its universal acceptance and purchasing
protection mechanism. Using credit cards gives buyers
more protection than any other payment options, in case
the seller turns out to be a malicious trading partner. A
more sophisticated solution is using a reputation or rating
mechanism. With such a reputation mechanism, buyers or
sellers know how previous business partners think about
the potential partner. This reputation system, if properly
used, can reduce the incidence of fraud. Many popular
auction sites employ all or a combination of the abovementioned mechanisms.
4. Functional requirements for buyer-centric
electronic marketplaces
Although current electronic marketplaces support other
phases of market transactions relatively well, they lack
negotiation capabilities. Considering the evaluation results
of current electronic marketplaces and negotiation needs,
we propose a buyer-centric electronic marketplace with
negotiation support. The buyer-centric electronic
marketplace has the following objectives:
1) It should support all phases of market transactions.
2) It is buyer-centric. In other words, buyers specify
product description and their preference and sellers
make offers based on the buyers’ specifications and
preference.
3) It should provide sophisticated 1:N negotiation
support. (i.e., one buyer and many sellers)
As we examined in the previous section, trading occurs
in roughly three phases. For each phase, electronic
marketplaces need to provide appropriate support for the
different stakeholders. Table 4 summarizes the ideal
systems requirements that this study identified for buyercentric electronic marketplaces for each stakeholder in the
different phases of trading.
< Table 4. Ideal systems requirements from each stakeholder’s perspective >
Buyer
Seller
Electronic marketplaces
Phase of
market
transaction
-browsing or search function to - to increase market liquidity (attracting
Information
- access to rating and/or
more buyers and sellers)
locate needed items.
phase
consumer feedback on
- to provide product/seller evaluation
-access to information about
product and sellers
- to provide check points and/or guides
buyers (e.g., rating)
- access to check points
for the product
-channel for advertising.(e.g.,
and/or guides for the
- to maintain profile of interested items
advertising in the “learning
product.(e.g. Circuitcity’s
to sellers so the system can notify sellers
product section”)
“learning product section”
when those items are on auction.
)
- profile matchmaking service
- to create a trading room
-monitoring tools that notify
Negotiation
- utility function eliciting
- to support multidimensional auction.
seller with necessary info to be
phase
tool(e.g., automatic RFQ
- to enforce negotiation(auction) rules:
generating tool, or pairwise winner. (* in case when open
>to make sure seller’s offer meets
auction protocol is used *).
comparison tool)
minimum qualification
- tools that evaluate their own
-tools that calculate total
- to act as trusted third party during
offer based on the buyer’s
logistics cost including
negotiation.
preference.
delivery and tax.
- tools that calculate total
- tool that evaluate offers.
logistics cost, including
delivery and tax.
- tracking capability for
- to generate electronic contract with
Settlement
- tracking capability for
shipment
date, and digital certificate.
phase
shipment
- delivery channel for digital
- to generate trade summary
- access to insurance
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service
- access to secure payment
mechanism
product
- secure payment mechanism
- automatic auditing and certification of
trade procedure
- to conduct post-settlement survey
- to provide legal service
- trust enhancing mechanism
- to provide means to enforce rules.
- profit model (commissions, set up fee
for profile of seller, adverting)
Other/
Institutional
service
Information phase
In an ordinary transaction process in the retail market,
buyers and sellers are matched first then they start
negotiating terms and prices. In the buyer-centric B2B
market, however, there is no separate phase for
matchmaking. The basic concept of buyer-centric B2B
market is to help buyers formulate their preference and
search for the product and seller that matches the
preference best. If there is no perfect match, negotiation is
necessary.
For this purpose, we propose using a multidimensional
auction mechanism in electronic marketplaces. In order to
do that, we have to decide how many issues are involved
and in what sequence the counter proposal is to be
handled. One way of doing this is to let the electronic
marketplaces fix the issues, and the buyers and the sellers
conduct negotiations over the fixed issues. However, in
order to reflect the buyers’ preference more correctly, it
will be better for the buyers to decide on the issues, while
the electronic marketplaces provide the necessary
information such as check points, or guides for the
products (e.g., http://www.circuitcity.com ) to help the
buyers clarify their preferences.
Sellers, on the other hand, want to know about the
buyer: the buyer’s credit record history and previous
buying habits. In addition, sellers need to monitor new
postings of RFQs. Electronic marketplaces should provide
means to monitor and notify the sellers of pertinent events
when they occur. Furthermore, sellers/manufacturers might
want to advertise their own product/service along with the
electronic marketplaces’ product guides/check points
services. This is revenue generation opportunity from the
electronic marketplaces’ point of view. This advertising
will also provide the potential buyer with more
information about the products and sellers. The electronic
marketplaces’ primary role is to provide the mechanisms
to facilitate information flow between buyers and sellers,
and to attract more buyers and sellers in order to increase
market liquidity.
Negotiation phase
Once buyers know about the products and sellers, they
need to formulate their preferences (i.e., RFQs). A
pairwise comparison technique may be used, since that
could help buyers articulate preferences more easily.
Basically what buyers need to do is to specify their utility
function with constraints.
After a buyer sets his preference, the electronic
marketplace needs to create a trading room for the
multidimensional auction. Multidimensional auctions have
different system requirements from conventional auctions.
First, in the case of a closed auction protocol, both buyers
and sellers should have a tool to evaluate offers according
to buyer’s preference, since multidimensional auctions
consider multiple issues. Second, electronic marketplaces
should establish specific rules for multidimensional
auctions. They may also need to provide options for
different choices of alternatives from a given auction
protocol. For instance, the buyer may choose between a
multi-rounding auction and a one-shot auction, and may
choose the degree of information feedback ( i.e. to what
extent he/she is willing to reveal information to the sellers,
e.g., bid ranking, score, utility). Also, bidding duration
should be flexible to minimize time overhead. More
specific
and
comprehensive
rules
concerning
multidimensional auction mechanism will be described in
the following section.
Settlement phase
Once negotiations are finished, payment and goods
must be traded according to the contract. In order to
support this, the electronic marketplaces should offer a
secure payment mechanism. The buyer also might want to
have an insurance option and tracking ability for shipment.
For digital/information products, the delivery of goods
should be done within the electronic marketplaces. From
the electronic marketplaces’ perspective, they need to act
as a middleman or a judge during the settlement phase.
Electronic contracts will be issued by the electronic
marketplaces along with a trading summary. And the
electronic marketplaces need to ascertain that the trade is
successfully finished.
Other/institutional service
The electronic marketplaces will need robust
mechanisms to solve the trust issue. One possibility is to
use third party certificate agencies. Those certifying
agencies can be operated by either the government or
credible brokers. The other approach that might be useful
in B2B trading is for brokers to investigate goods on a
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transaction base. The brokers investigate the product to be
sold and issue a letter of credit while taking responsibility
as well as commissions.
In addition, the electronic marketplaces must provide
secure transaction platforms by guaranteeing network and
information security [7]. Finally, the electronic
marketplaces must have mechanisms to generate their own
profit. The potential revenue generating sources may
involve commissions from suppliers, flat fee per
transaction, set up fee for profile of sellers, and selling
advertising spots.
5. Multidimensional auction model with
evolutionary negotiation support (MAMENS)
In this section, we first describe the design criteria for
the MAMENS system. Next, we provide a description of
the operation of the system.
5.1 Design criteria
A number of studies propose multidimensional auction
models [ 5, 9, 18, 20, 22]. Based on the analysis of those
models, MAMENS system was designed to foster more
efficient outcomes by providing the following two
improvements over previous multidimensional auction
models: use of sellers’ feedback and buyers’ post utility
value selection.
Use of sellers’ feedback
The MAMENS system was designed to incorporate
seller’s feedback (i.e. cost function weight) to support
evolutionary negotiation support. In the conventional
auction or procurement process, the buyers research
current market conditions ( i.e., product feature and price)
and create RFQs to initiate the auction or procurement
process. Therefore, the buyers’ aspiration level is
determined by the research results. In case the buyers fail
to properly assess the market conditions when they initiate
auctions (e.g., buyers’ requirement is set too high for a
given budget), however, the auction leads to failure,
causing extra cost and time. Furthermore, the buyers do
not receive any useful information to adjust ( or relax)
their RFQ. Therefore, the buyers must initiate another
round without knowing which requirement is set too high
within a given budget. Such a situation occurs due to
incomplete information inherent in the current auction
process. We argue that this can be resolved by providing
the buyers with information on the market’s condition. The
MAMENS system is designed to foster more efficient
outcomes by providing sellers’ cost structure to buyers.
However, exposing detailed cost structure can be too
sensitive for sellers. Therefore, revealing of sellers’ cost
structure should be minimized to provide only enough
information for buyers to initiate the next round of auction
with a more reasonable RFQ. Suppose the following:
Through a multidimensional auction, a used car buyer
wants to buy a car with automatic transmission built after
1993, at less than $3000. Unfortunately, no salesman can
sell a car with that feature within that price, leading to
failure of the auction. In that case, the buyer has only two
choices: either give up the automatic transmission or
consider buying an older model. However, the buyer has
no idea which of these two factors will cost less to the
salesman. Therefore, the buyer should either relax the
requirement which is personally less important, or not
purchase the car. If the buyer could have known the
sellers’ cost structure ( i.e., which feature costs more than
the other), the buyer would have had a greater chance of
mutually beneficial trading in the next round.
Buyers’ post utility value selection
The MAMENS system also allows buyers to determine
their preference structure after the range of values for all
the issues have been determined--in other words, after
collecting offers from sellers. Most existing studies on
bargaining assumed the linearity of buyers’ utility.
Although this simplistic model may work for a small set of
possible agreements, a real bargaining situation is much
more complex. Negotiators often have non-linear utility
functions over the issues. For example, a buyer who
prefers a quicker delivery time may show no improvement
to his utility as long as delivery time is less than three
days. Therefore, we propose that the proper way to elicit a
buyer’s preference structure is after the range of values for
all the issues have been determined.
5.2 Operation of MAMENS mechanism
< Assumptions >
1. MAMENS uses a multi-round closed auction protocol.
(i.e. sealed bid )
2. The reserve price is not shown to sellers because if it
were, they would tend to set their price close to it (even if
they could offer a lower price).
3. For requirements other than price; buyers reveal both
the requirement itself and its weighted importance.
4. Each requirement is either negotiable or non-negotiable.
Buyer’s preference
A bid or RFQ by buyer i is denoted by an array that
contains m possible requirements bi={b i1,b i2, .. ,b im},
which include the price and other requirements from the
buyers ( We assume b i1 is the price while other
requirements can be anything), and an array of 0-1 integers
bc i={bc i1, bc i2, …., bc im},which indicates the conditions
of each requirement; 0 for “negotiable”, and 1 for “not
negotiable”, that is, even price can be negotiable.
In real world situations, a requirement must have a
direction as well: a positive direction in which the increase
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of value will produce more utility (e.g., quality) and a
negative direction in which the increase of value will
decrease utility (e.g., price, delivery time). In explaining
the model, however, we will assume all the requirements
have only positive direction.
The buyer (or bid taker) also has a weighted-utility
function that he derives from a bid. The utility function is
denoted by Ui(b)=Σw j*b ij where wj is the weight to the j th
requirement and Σw j=1. This utility function converts both
monetary and non-monetary attributes into a utility.
When a buyer initiates an auction protocol, electronic
marketplaces reveal requirements bi (except bi1, i.e. price)
and their relative weights (i.e. w), including that of price.
However, the condition of requirements bci, is not revealed
in order to maximize the buyer’s utility [22].
Seller’s offer
Based on buyer i’s requirements bI (except bi1, i.e.
price) and its relative weight, seller j constructs an offer Oj
to maximize Ui (b) while minimizing the cost that he
incurs.
Oj is denoted by O j=(Oj1,O j2,…..,O jk) where k is the
number of requirements and O j1 is the asking price. Also,
sellers provide a cost function weight to the buyer to
indicate which requirement is most expensive to fulfill in
order to give a clue to the buyer, in case the buyer needs to
adjust or relax his requirements. The cost function weight
by the seller is denoted by C j ={C j2, C j3,…,C jk}where C jk
is the relative weight of the cost-distribution to seller j, the
ranking among attributes from most to least cost-causing,
for the kth requirement. This can be considered as a
counter-utility function showing which requirements by
the buyer are more difficult to satisfy from the seller’s
perspective.
Evaluation of collected offers and evolutionary
negotiation process
Once the deadline is reached, the electronic
marketplace collects all the offers,( i.e. O j with
corresponding cost function weight C j.) from sellers.
Then, we can expect the following scenarios.
< Scenario 1: when there is at least one offer that
satisfies all of the non-negotiable requirements>
Find one that derives most utility to the buyer. To do that,
• Define a range of values for each negotiable
requirement by collecting all the value from the offers,
that is [Min(Oj k), Max(Oj k)] for k th requirement where
j=1...N (total number of sellers),
• With the range of values, the buyer determines the
weighted utility curves for the negotiable
requirements.
• Choose the offer that derives the highest utility to the
buyer.
• Terminate the auction.
<Scenario 2: when no such offer exists>
The buyer needs to adjust or relax his requirements based
on the sellers’ feedback.
• Find the least important non-negotiable requirement
for the buyer that costs most to the sellers ( One will
be most likely to increase utility value for both buyer
and sellers.)
• Then, MAMENS suggests the buyer should make this
requirement negotiable.
• Initiate new round of sealed bid with modified RFQ.
6. Evaluation framework
In order to compare different electronic marketplaces
or auction mechanisms, some evaluation framework is
necessary. In this section, we will introduce an evaluation
framework based on transaction cost theory. In economies,
one can observe two basic mechanisms for coordinating
the flow of goods and service through adjacent steps in the
value-added chain: markets and hierarchies [11]. Previous
research explained the shift from hierarchies toward
markets based on the transaction cost theory [1, 11, 14].
According to this theory, the price of a product consists of
three elements; production costs, coordination costs, profit
margin [11, 17, 21]. Production costs include physical or
other primary processes necessary to create and distribute
the goods and services. Coordination costs include costs of
all the information processing necessary to coordinate
people for transferring goods and services. For example,
coordination costs include costs associated with
determining design, price, quantity, and delivery schedule
[21]. Malone et al. [11] point out that coordination costs
are higher in markets than in hierarchies. In addition, since
an electronic marketplace does not create goods and
services by itself, the only cost-saving source for an
electronic marketplace is in reducing the coordination
costs. Therefore, most of the functions of the electronic
marketplaces are focused on reducing coordination costs.
Sarkar et al. [14] point out in some cases the transaction
costs of using electronic marketplaces can be lower than
that of direct transactions between buyer and seller without
intermediation.
Since we are interested in evaluating performance of
different market structures or auction mechanisms, we will
only focus on coordination costs. Our argument is that if
coordination cost is lower in multidimensional auctions
such as our MAMENS than in conventional auctions, we
can assume a multidimensional auction is better than a
conventional auction in terms of transaction cost theory.
Based on findings of previous studies [11, 17, 19], we
identified the following types of coordination costs.
1.search cost
2.risk cost
3.negotiation cost
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Proceedings of the 34th Hawaii International Conference on System Sciences - 2001
Search costs include time, effort, and money involved
in searching for a seller who has the product demanded at
an acceptable price with acceptable product features and
quality [17]. From the seller’s point of view, on the other
hand, search costs may include marketing and advertising
costs as well [17]. Risk costs represents protecting against
risks of opportunistic behavior by trading partners. This
situation happens through the consumers’ perception that a
product or service may fail to meet expectations [11, 17].
Negotiation costs are the costs associated with determining
price, quantity, delivery schedule, and other factors with
trading partners [11]. For example, negotiation costs in
electronic marketplaces or auctions include monitoring
costs, delay, and search costs [19]. Table 5 summarizes the
comparison between multidimensional auction and
conventional auction based on the above cost model.
Negotiation costs are much lower in multidimensional
auctions than in conventional auctions. In a traditional
market, all negotiations are done mainly off-line, taking
considerable time and costs. Conventional auctions
provide the on-line mechanism for negotiating the single
factor of price. In conventional auctions, however,
negotiations over other factors are conducted off-line
causing extra time and costs. On the other hand, all
negotiation activities can be done within the electronic
marketplaces in multidimensional auctions. Furthermore,
multidimensional auctions can provide the mechanism for
one-to-many simultaneous negotiations based on multiattributes. Overall, the evaluation results show that buyers
and sellers enjoy more costs saving in multidimensional
auctions than in conventional auctions.
7. Conclusion
< Table 5. Comparison based on transaction cost
theory >
Search
cost
Risk cost
Negotiati
on cost
Traditional
market
Conventional
auction
Multidimensional
auction
High
Medium
Low
Medium
High
High
Medium
High
Low
Search costs are lower in multidimensional auctions
than in conventional auctions. Although search cost is
lower in conventional auctions than in traditional markets
thanks to information technology, a consumer will still
have to search for a seller who has the product demanded
at an acceptable price with acceptable product features and
quality [17]. Sellers, on the other hand, still need to
struggle to attract buyers in a conventional auction.
However, In a multidimensional auction, or a buyer-centric
electronic marketplace, once the RFQs are posted in the
electronic marketplaces, sellers compete with each other to
make an offer. Buyers do not have to search for qualified
sellers. Sellers also do not have to struggle to find
customers as long as they monitor RFQs.
It is very difficult to compare risk costs in
multidimensional auctions and in conventional auctions,
since it is more related to institutional infrastructure than a
functional difference between the two systems. Major risk
costs stem from conducting trade with unfamiliar partners.
To ease the risk costs, electronic marketplaces should
provide trust mechanisms as we have explained earlier.
However, it is believed that multidimensional auctions can
help lower risk costs by using automatic RFQ generating
tools, such as buyers’ articulating requirements for
product/service features. Also automatic contracts issued
by a trusted-third party (i.e. the electronic marketplaces)
help resolve conflicts, in case the buyer and the seller do
not agree on terms or conditions.
This paper has discussed the evaluation of current
electronic marketplaces and identified desirable features
for buyer-centric electronic marketplaces. To make buyercentric electronic marketplaces efficient, we propose
MAMENS as a new multidimensional auction model with
evolutionary negotiation support, and we provide an
evaluation framework for the model. To the best of our
knowledge, MAMENS is the first system that supports
negotiation in both directions between a buyer and sellers
using cost function from sellers. However, this study did
not examine the case of multi-unit auctions [12, 20] and
combinatory auctions [12, 13]. In certain conditions, it
might be beneficial for the buyer to select multiple sellers
who jointly ( either with or without pre-arrangement
among them) deliver the best value to the buyer using
combinatory auctions [13]. For the future, we intend to
implement a prototype of MAMENS in line with the
findings of our study. Finally, we intend to conduct
empirical testing to determine if MAMENS does achieve
more efficiency than conventional auctions or other on-line
multidimensional auctions.
Acknowledgments
The author wishes to thank Prof. Tung Bui for his
suggestions to improve this article. The author also wishes
to thank Liliane B. Bahali for help with collecting data on
existing electronic marketplaces, and Sandra Laney for her
editing skills.
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