Dynamic Pricing:
Auctions
(modifications by
Judith Molka-Danielsen)
18.03.03
Prentice Hall, 2002
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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 (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
Prentice Hall, 2002
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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)
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
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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
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)
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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
(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.
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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 highest
second bid, also one bid, silent.
Also called a (Vickrey auction). It
encourages bidding true value.
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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
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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 (price matches value)
Entertainment — interaction in auction can be
entertaining and exciting
Anonymity—3rd party allows buyer anonymity
Convenience — buyers trade from anywhere
(Cell phone – Call-ins are also allowed more
often in traditional auctions)
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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
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Limitations
Security
Possibility of fraud
May purchase a
defective product
buying sight unseen
Fraud rate is very
high (false seller
ratings)
Limited participation
C2C auctions not
necessarily secure (no
3rd party)
B2B auctions
conducted on highly
secure private lines
Software
Invitation only
Open to dealers
only
Prentice Hall, 2002
Few off-the-shelf
packages that can
handle auctions
“Best practices” still
being defined
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Lessons of Auctions
1. 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 emarkets 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
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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
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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 eauctions and specialty auctions
worldwide
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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
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
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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—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.)
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
Pricing and billing
Payment methods (transfer, escrow, credit cards)
Internet Shipping and postage
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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 (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
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Double Auctions 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
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
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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Figure 9-9
Components of a Comprehensive Auction Site
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