MIS 5105Dr. Garrett

Forrester Research, October 4, 2005: “Online consumer auction sales will reach $65

billion by 2010, accounting for nearly one-fifth of all online retail sales. While sales will grow steadily over the next few years, growth will be tempered by slow adoption of the format by mainstream consumers. As these shoppers turn to the merchants they trust offline, enterprise sellers won't see the need to sell through auctions. This will force eBay to prioritize integration with Shopping.com to keep sales growth steady, and force merchants to rethink search spending strategies. “

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

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

Ascending Price (English) Auction Descending Price (Free Fall) Auction Reverse Auction Yankee Auctions (multiple identical

items with a ascending price and minimum bid)

Dutch Auctions (multiple identical items with a descending price)

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

Reverse auctions are nothing new in B2B The online environment offers several

advantages: Process is greatly accelerated (sometimes down to

minutes) Buyers can reach a wider range of suppliers Continuous outbidding reduces the need for

additional rounds Suppliers can equally address new geographic

markets Where prices are open, suppliers can understand

the various price points and make an informed decision whether to enter a market

The building of relationships is given a lower priority

Tendency not to involve suppliers during the design stages … results in fewer saving or quality improvements for the production stage

Many small ticket items confusing requirements and expectations

Prices can tumble quickly without commensurate reductions in production cost, leading to smaller margins and, ultimately, reduced competition and choice

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

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

buying products where there is a clear industry specification for the item and recognized quality standards.

the supplier and manufacturer are well known and have a proven track record.

the industry does not suffer periods of shortages.

After-purchase service is minimal or very unlikely

distance is not an inhibitor to the supply or the service of the product.

the required item is difficult to find.

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

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)

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

Possibility of fraud May purchase a

defective product buying sight unseen

Fraud rate is very high

Limited participation Invitation only Open to dealers

only

Security C2C auctions not

necessarily secure B2B auctions

conducted on highly secure private lines

Software Few off-the-shelf

packages that can handle auctions

“Best practices” still being defined

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

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

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

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

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

Source: Modified from Klein (1997), p. 4.

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

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

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

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

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

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

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

Amazon’s BidClick proxy Dynamic Posted Pricing models that use

agents to determine competitive prices

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

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

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

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

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

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

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

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

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

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

Selling reproductions – selling a reproduction described as an original

High shipping cost and handling fees—used by seller as a source of revenue to offset low selling price

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

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

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

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

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

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

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

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

Benefits of online auctions Convenience and ubiquity Simpler and faster Privacy

Limitations of online auctions Visual quality Memory capacity Security

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

Your own auction site vs. a third-party site

Cost benefit analysis Auction strategies Support services Payment

Controlling what is auctioned Change agent Building auction applications Bartering Building auction sites