1 Prentice Hall, 2002 Dynamic Pricing: Auctions (modifications by Judith Molka-Danielsen) 18.03.03.

Prentice Hall, 2002 1

Dynamic Pricing:Auctions

(modifications by Judith Molka-Danielsen)

18.03.03


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 auctionsLike offline auctions, performed on PCHost sites act like brokers (intermediary) Buyers may solicit offers from potential sellersMore potential bidders


Fundamentals

Dynamic pricing refers to a commerce transaction in which prices are not fixed

Forms of dynamic pricing:NegotiationBargaining

Four major configurations depending upon how many buyers and sellers are involved:

One buyer, one sellerOne buyer, many potential buyersOne seller, one buyerOne seller, many potential buyers


Figure 9-2Types of Dynamic Pricing


Fundamentals

Dynamic pricing and auctions (cont.)English auctions (sequentially one item at a time)

Miniumum bid - specifies lowest sell priceCan have other criteria besides price (payment date)Usually one winnerCan take days on the Internet, minutes if live


Figure 9-3English Auction, Ascending Price


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 quantityMultiple winners pay same price, can be lower than what you bid (but higher bids get priority)



Dynamic pricing and auctions (cont.)Free fall (declining price) auction

One item auctioned at a timePrice 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.



Dynamic pricing and auctions (cont.)Sealed-bid first-price auction — silent auction, only one bid; item goes to highest bidderSealed-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.


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 loyaltyLiquidation — easier for sellers trying to be rid of large quantities of obsolete items very quickly


Benefits (cont.)

Benefits to buyers:Opportunities to find unique items and collectiblesChance to bargain — buyers can bid with seller for desired prices (price matches value)Entertainment — interaction in auction can be entertaining and excitingAnonymity—3rd party allows buyer anonymityConvenience — buyers trade from anywhere (Cell phone – Call-ins are also allowed more often in traditional auctions)


Benefits (cont.)

Benefits to auctioneers:Higher repeat purchase rates — higher than on B2C sitesMore “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 business80,000 car dealers involvedProvide services to customers


Limitations

Possibility of fraudMay purchase a defective product buying sight unseenFraud rate is very high (false seller ratings)

Limited participationInvitation onlyOpen to dealers only

SecurityC2C 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


1. greater liquidity 2. Efficient way to find best price 3. At Low cost can hide market operations and offer

product quality4. 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


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 timeAttract considerable attention (telecom spectrum)

Auctions as a highly visibility distribution mechanismDeals with special offers (airline seats)Use the mechanism to attract customers (get attention of bargain hunters)

Auction as a component in e-commerce


Auction Process and Software Support

Phase 1: Searching and comparing auctions and their prices

Mega-searching and comparisonsAuctionWatch.com—directory of auction sitesInternetauctionlist.com—news about e-auctions and specialty auctions worldwide


Auction Process andSoftware Support (cont.)

Automated search servicesNotify buyers when items they are interested in are availableBuyers complete a simple form about the item

Browsing site categoriesDirectory of categories for buyers to browse—narrows their searchMay allow sorts by times auctions are held

DBasic and advanced searchingBuyers use search engines to look for a single term, multiple terms, key wordsAdvanced search requires a form to be filled out



Phase 2: Getting started at an auctionRegistration and profiling

Sellers and buyers register before entering the auctionBuyers can check seller’s profile

Listing and promotingPricing

To post an item for bidding, sellers must decide on:

Minimum bid amountBid incrementReserve price (lowest price seller is willing to accept)

Search past auctions and the transacted prices to provide a benchmark for buyer’s bidding strategy



Advertising wizard—helps users create attractive ads and auction postingsAuction assistant—helps create attractive auction listingsAuction 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 saleMister Lister on eBay— allows sellers to upload many items at a timeBulk Loader—seller can load several auctions into spreadsheet programs


Phase 3: The actual biddingBid watching and multiple biddings

Buyers visit the user page of an e-auction Web site at any time to check status of an auctionThey can review bids and auctionsTools provided in the U.S. to view bids across several auction sites

BidWatchBid MonitorEasyScreen 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 bidPlace first bid manuallyProxy executes the bids keeping bids as low as possible



Phase 4: Post-auction follow-upPost auction notifications

Bidding notifications, End-of-auction notices, Seller noticesPostcards and thank-you notes

User communicationChat groups, Mailing lists, Message boards

Feedback and ratingPricing and billingPayment methods (transfer, escrow, credit cards)Internet Shipping and postage



Reverse price auction—lowest price a seller is willing to acceptVertical auction—specialized auctions know as “auction vortals”

Used in B2BMany auction sites specialize in one area

Bid retractionCancellation of a bid by a bidder, used only in special circumstancesBids are usually considered to be binding

Featured auctionsExtra exposure when listed on Web sitesSellers pay extra for this service

Additional terms and rules


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 biddersComputers 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 1998Livestock in Australia—electronic online system for trading cattle and sheep


Double auctionsSingle auction

Item is offered for sale with multiple buyers making bids on the itemMultiple sellers make offers to sell an item

Double auctionMultiple units of a product may be auctioned off at the same timeBuyers and sellers can make bids during trading periods

Prices in double auctions—multiple buyers and sellers

Double Auctions and Pricing Issues


Double Auctions and Pricing Issues (cont.)

Prices in auctions: higher or lower?Prices tend to be higher when there is only one sellerAuctioneer has a better position to maximize revenuesPrices are lower in cases of liquidationSeller’s objective is to sell as quickly as possible


Double Auctions and Pricing Issues (cont.)

Pricing strategies in online auctionsBoth sellers and buyers may develop strategies for auctionsSellers have option to use different mechanismsBuyers need to develop strategy regarding increases in bids and when to stop bidding


Fraud in Auctions and Its Prevention

Types of e-auction fraudBid shielding—the use of phantom bidders to bid at a very high price when an auction beginsShilling—sellers arrange to have fake bids placed on their items to artificially jack up pricesFake 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


Fraud in Auctions and Its Prevention (cont.)

Selling reproductionsHigh shipping cost and handling fees—selling a reproduction described as an originalFailure to ship merchandise—money is paid out but merchandise never arrivesLoss and damage claims—buyers claim they never received an item or received it in damaged condition, request a refundSwitch and return—seller accepts a return, but receives broken or mangled objects


Protecting against e-auction fraudUser identity verification—voluntary program encourages users to supply eBay with information for online verification—qualifies them for highest level of verificationAuthentication service—determines whether an item is genuine and described appropriatelyGrading services—determines physical condition of an itemFeedback 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 usersEscrow 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 conditionReview of what comparable items have sold for in recent months

Verifications—a way of confirming the identity and evaluating the condition of an item


Figure 9-9Components of a Comprehensive Auction Site

1 Prentice Hall, 2002 Dynamic Pricing: Auctions (modifications by Judith Molka-Danielsen) 18.03.03.

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Transcript of 1 Prentice Hall, 2002 Dynamic Pricing: Auctions (modifications by Judith Molka-Danielsen) 18.03.03.