Chapter 9
Dynamic Pricing:
Auctions and More
Prentice Hall, 2002
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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 mcommerce
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Electronic Auctions in Action
Illustrative examples:
C2B reverse auctions: DM&S
B2C and C2C forward auctions: Dell Computers
C2C forward auctions: all of us at eBay
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Figure 9-1
A 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 9-2
Types of Dynamic Pricing
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Fundamentals
Dynamic pricing and auctions (cont.)
English auctions (sequentially one item at a
time)
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Figure 9-3
English Auction, Ascending Price
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Fundamentals (cont.)
Dynamic pricing and auctions (cont.)
Yankee auctions—multiple identical items with a
minimum bid
Dutch auctions—multiple identical items starting
at high price and moving lower
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Figure 9-4
Computerized Auction Clock
for 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 auction—silent auction,
only one bid; item goes to highest bidder
Sealed-bid second-price auction—item
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
Disintermediation—sellers gain more customer
dollars by offering items directly
Better customer relationships—buyers and sellers
have more time to interact, creating customer
loyalty
Liquidation—sellers 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 bargain—buyers can bid with seller
for desired prices
Entertainment—interaction in auction can be
entertaining and exciting
Anonymity—3rd party allows buyer anonymity
Convenience—buyers trade from anywhere
(even cell phone)
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Benefits (cont.)
Benefits to auctioneers:
Higher repeat purchase—auction 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 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
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Limitations
Security
Possibility of fraud
May purchase a
defective product
buying sight unseen
Fraud rate is very
high
Limited participation
C2C auctions not
necessarily secure
B2B auctions
conducted on highly
secure private lines
Software
Invitation only
Open to dealers
only
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Few off-the-shelf
packages that can
handle auctions
“Best practices” still
being defined
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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 mechanism—establish
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 orders—liquidity
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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 9-6
The 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
demand—if 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 auction—vendors submit offers and
lowest-priced vendor gets the job
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“Name-Your-Own-Price”
C2B Model (cont.)
Other models
Savvio.com—model 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.com—directory of auction sites
Internetauctionlist.com—news about e-auctions
and specialty auctions worldwide
Yahoo!’s auction list—400 auction-related links
Bidder’s Edge—searches eBay, Yahoo, Amazon
for specific items
Turbobid—provides mega-search series that
helps local bidders find items from a pool of
e-action sites
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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
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Auction Process and
Software 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 seller’s profile
Listing and promoting
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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—auctionposting 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
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Auction Process and
Software 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 buyer’s bidding
strategy
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Auction Process and
Software 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 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
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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 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
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Auction Process and
Software 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 9-7
The Process of E-Auctions
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Auction Process and
Software Support (cont.)
Additional terms and rules
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
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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 bidder’s financial capability
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Auctions on Private Networks (cont.)
Cars in Japan’s 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 Australia—electronic 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 auctions—multiple buyers and
sellers
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Double Auctions, Bundle Trading,
and Pricing Issues (cont.)
Bundle trading—personalization 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
Seller’s 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 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
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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
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Fraud in Auctions
and Its Prevention (cont.)
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
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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—1st-time nonpayment
warning, 4th offense is cause for suspension from
auction
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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
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Bartering Online
Bartering—exchange of goods and services
Bartering exchanges
Give your offer to intermediary
Intermediary asses value of your product or
service in”points”
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
Search—gathering information about products,
services, potential vendors and customers
Selection—processing and filtering information in
order to select a product and trading partner
Negotiation—interactions with bids, offers,
agreements, and contracts
Continuing selection and negotiation—repeated
sequentially until an agreement is reached
Transaction completion—payment 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 auctions—face regular problems of
selling online in international environment
Selling art online in real-time auctions—
allows real-time auction bidding and partners
with eBay
Strategic alliances—major 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 9-9
Components of a Comprehensive Auction Site
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Figure 9-10
Integrated Auction Business Model
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