MIS 5105 Dr.

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 demandif 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 auctionvendors submit offers and lowestpriced vendor gets the job

Other models
Savvio.commodel 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 Disintermediationsellers gain more customer dollars by offering items directly Better customer relationshipsbuyers and sellers have more time to interact, creating customer loyalty Liquidationsellers liquidate large quantities of obsolete items very quickly

Benefits to buyers:
Opportunities to find unique items and collectibles Chance to bargainbuyers can bid with seller for desired prices Entertainmentinteraction in auction can be entertaining and exciting Anonymity3rd party allows buyer anonymity Conveniencebuyers trade from anywhere (even cell phone)

Benefits to auctioneers:
Higher repeat purchaseauction 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 businessManheim 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

Security
C2C auctions not necessarily secure B2B auctions conducted on highly secure private lines

Limited participation
Invitation only Open to dealers only

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 mechanismestablish 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.comdirectory of auction sites Internetauctionlist.comnews about e-auctions and specialty auctions worldwide Yahoo!s auction list400 auction-related links Bidders Edgesearches eBay, Yahoo, Amazon for specific items Turbobidprovides 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 browsenarrows 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 sellers 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 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

 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 buyers 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

Amazons 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

Additional terms and rules

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

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 bidders financial capability

Cars in Japans 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 Australiaelectronic 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 auctionsmultiple buyers and sellers

Bundle tradingpersonalization 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 Sellers 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 shieldingthe use of phantom bidders to bid at a very high price when an auction begins Shillingsellers arrange to have fake bids placed on their items to artificially jack up prices Fake photos and misleading descriptionssellers distort items (e.g., borrowing images, ambiguous descriptions) Improper grading techniquesdescription 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 feesused by seller as a source of revenue to offset low selling price Failure to ship merchandisemoney is paid out but merchandise never arrives Loss and damage claimsbuyers claim they never received an item or received it in damaged condition, request a refund Switch and returnseller accepts a return, but receives broken or mangled objects

Protecting against e-auction fraud

User identity verificationvoluntary program encourages users to supply eBay with information for online verificationqualifies them for highest level of verification Authentication servicedetermines whether an item is genuine and described appropriately Grading servicesdetermines physical condition of an item Feedback forumprovides users with ability to comment on their experiences with other individuals

 Insurance policyeBay offers insurance underwritten by Lloyds of London at no cost to eBay users Escrow servicesitems valued at more than $200, eBay recommends escrow services (for a fee) Non-payment punishment1st-time nonpayment warning, 4th offense is cause for suspension from auction

 Appraisal servicesuse a variety of methods to appraise items

Assessment of authenticity and condition Review of what comparable items have sold for in recent months

Verificationsa way of confirming the identity and evaluating the condition of an item

Barteringexchange of goods and services

Bartering exchanges
Give your offer to intermediary Intermediary asses value of your product or service inpoints 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

Searchgathering information about products, services, potential vendors and customers Selectionprocessing and filtering information in order to select a product and trading partner Negotiationinteractions with bids, offers, agreements, and contracts Continuing selection and negotiationrepeated sequentially until an agreement is reached Transaction completionpayment and delivery

Benefits of online auctions

Convenience and ubiquity Simpler and faster Privacy

Limitations of online auctions

Visual quality Memory capacity Security

General auctionsface regular problems of selling online in international environment Selling art online in real-time auctionsallows real-time auction bidding and partners with eBay Strategic alliancesmajor 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