Chapter 9 Dynamic Pricing: Auctions and More

Chapter 9Dynamic Pricing:Auctions and More Prentice Hall, 2002

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 m-commerce Prentice Hall, 2002

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 Prentice Hall, 2002

Figure 9-1A Dell Product in an Auction Prentice Hall, 2002

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 Prentice Hall, 2002

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 Prentice Hall, 2002

Figure 9-2Types of Dynamic Pricing Prentice Hall, 2002

Fundamentals • Dynamic pricing and auctions (cont.) • English auctions (sequentially one item at a time) Dynamic Prentice Hall, 2002

Figure 9-3English Auction, Ascending Price Prentice Hall, 2002

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 Prentice Hall, 2002

Figure 9-4Computerized Auction Clockfor Dutch Flower Auctions Source: Used with permission of aquarius-flora.com. Prentice Hall, 2002

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 Prentice Hall, 2002

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) Prentice Hall, 2002

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 Prentice Hall, 2002

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) Prentice Hall, 2002

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 Prentice Hall, 2002

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 Limitations Prentice Hall, 2002

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 Prentice Hall, 2002

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 Prentice Hall, 2002

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 Prentice Hall, 2002

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 Prentice Hall, 2002

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 Prentice Hall, 2002

Figure 9-6The Components of Auctions Source: Modified from Klein (1997), p. 4. Prentice Hall, 2002

“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 Prentice Hall, 2002

“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 Prentice Hall, 2002

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 Prentice Hall, 2002

Auction Process andSoftware 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 Prentice Hall, 2002

Auction Process andSoftware 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 Prentice Hall, 2002

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 Auction Process andSoftware Support (cont.) Prentice Hall, 2002

Auction Process andSoftware 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 Prentice Hall, 2002

Auction Process andSoftware 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 Prentice Hall, 2002

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 Auction Process andSoftware Support (cont.) Prentice Hall, 2002

Auction Process andSoftware 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 Prentice Hall, 2002

Auction Process andSoftware 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 Prentice Hall, 2002

Figure 9-7The Process of E-Auctions Prentice Hall, 2002

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 Extra exposure when listed on Web sites Sellers pay extra for this service Auction Process andSoftware Support (cont.) Additional terms and rules Prentice Hall, 2002

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 Prentice Hall, 2002

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 Prentice Hall, 2002

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 Prentice Hall, 2002

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 Prentice Hall, 2002

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 Prentice Hall, 2002

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 Prentice Hall, 2002

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 Prentice Hall, 2002

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 Prentice Hall, 2002

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 Prentice Hall, 2002

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 Prentice Hall, 2002

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 Prentice Hall, 2002

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 Prentice Hall, 2002

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 Prentice Hall, 2002

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 Prentice Hall, 2002

Chapter 9 Dynamic Pricing: Auctions and More