Online Auctions and Marketplaces

For Lo205 2005

Online AuctionsAuction Watch currently lists more than 1500 auction-related Web sites in 40 products categories.•In Norway: QXL, Netthandel, Finn …. .no The number of items that are listed daily on Ebay: 700,000+•Ebay receives an 8% commision on each sale. Sellers also pay to list items and for special features in auctions. Their profits are much higher than Google.com or Amazon.com, why?

•Why may the number of seller begin to decrease on Ebay? What are the sellers doing instead?

What’s being auctioned online?

Odd items…Willie Nelson’s Tour BusNike Ajax Surface-to-Air Guided MissileAlien FetusPeople (ISP employees)Elvis’s Dental RecordsTyrannosaurus Rex SkullHuman Kidneyhttp://www.disturbingauctions.com/

And also..• A Chad Collection from Palm Beach county ballot

Auction Models

Auction Types

Auctions - one seller, many buyers English (straight) Dutch First Price Second Price

Characteristics Reserve Price Private Restricted Access

Reverse – one buyer, many sellers Exchange – many buyers, many sellers

Auction Taxonomy

Auction Type Open Bidding Sealed Bidding

Ascending English First Price

Descending Dutch Second Price

Vickrey

‘Regular’

Auctions

Reverse Auctions

English Open, Ascending. Highest bid wins

Open, bids go down – lowest bid wins.

Dutch Open, price falls and the highest bid wins

Open price rises and highest bid wins

Sealed Bid First Price

Sealed highest bidder wins Sealed lowest bidder wins

Vickrey Highest bidder wins and pays the next bidder’s bid

Lowest bidder wins and receives the next bidder’s bid

Market Types

Market TypesParticipant Model

B2B B2C C2C

One to Many

Ingram Micro

Mercata

Ubid

Egghead

Not applicable

Many to Many

VerticalNet

BizBuyer

Priceline Ebay

Amazon

Structure of an Auction Two factors determine auction market outcomes:

Form in which bids are made The sequence rules for bidding

Let us look at four basic types The ascending bid auction (English Auction)

Open, calling of bids. Usually Oral, now electronic. Bidders drop out one by one and the one remaining

bidder wins. Most often used in B2C and C2C.

Online and Off Line - What Auction Models Operate?

Ascending Bid: Antiques, Artwork, some real estate on eBay was sold recently using this method – C2C, B2C, B2B.

Descending Bid: Dutch flower auctions, Commodity procurement, eProcurement.

First Price Sealed Bid: sometimes used in B2B procurement, mineral rights, real estate Software Project Development contracts, etc.

Second Price Sealed Bid: Not a frequently seen beast - stamps auctioned by mail.

Why Auctions? Discovering Price

- Dynamic prices

Experience Exciting experiences:

• Increase repeat purchase rate• Create sticky sites• Assist in personalization

People are willing to pay more for experience

A better experience is a competitive advantage that will benefit the bottom line

www.mercata.com

Benefits Buyers

Obtain object of interest Increased access to goods Feeling of success Engaged in stimulating entertainment Part of a community Pay perceived value for an item

Sellers One man’s junk is another man’s treasure Additional sales channel

• Extended product reach Potential for greater financial return

• Efficient markets Customer acquisitions Market exposure

Benefits for the Market Inventory surplus selloffs (less waist) Realize more efficient markets Realize higher average selling price

(higher value market) Potential for increased ROI on

products at various stages of the product life cycle

• New product intros, clearance goods, overstocks, off-lease goods..(higher value products)

Efficient Markets Increased revenues on inventory Streamline processes Decreased overhead costs Elimination of costly middlemen Increased inventory turns Creation of new intermediaries Ability to test pricing Increased revenue with new and one-of-a kind

items Avoid paper trails and lengthy communications

Customer Acquisition and retention

Convert site browsers to registered users One new customer from each bid Valuable information gathered on losing

bidders Losing bidders are great prospects

Remarketing is straightforward• Refer them to your site• Coupons • Newsletter• E-mail notification for next similar auction

According to Forrester Research, email sent to an in-house customer costs $2/sale compared to costs up to $286/sale rented list and $100 using banner ads

Market Exposure Gain valuable customer information

• Registration• Bid history

Instant knowledge of market demand Cost effective marketing campaigns

• Branding & Visibility• Test markets & Pricing Strategies• Deliver more personalized content

Successful Auctions Sense of community Trust

Sense of Community

Part of the familyeBay caféBulletin boards

LifestylePowersellers

Self policing Neighborhood WatchNet Cops

Trust

Insurance Coverage Escrow service (iEscrow) ID Verification Opinions/ Verification/ Grading VeRO (Verified Rights Owner) Dispute Resolution Policies for users and items

• Rob’s Rules Feedback on users

iEscrow

Feedback

Feedback on usersHelp determine reliability

• Positive / Neutral / Negative

Acknowledged common courtesyAll sites have different feedback

systemsStar rating system

Auction Environment

Exciting vs. Annoying Novelty of traditional format

wearing off Jupiter predicts by 2004, online

auction revenues will more than double to $19.6B, but other forms of dynamic pricing will leap 7 fold to $7B

Business-to-BusinessDynamic Pricing models for business exists at two

points in the supply chain:

1) Sourcing - Buyer-Centric Web sites• Procurement• Includes long-term contracts and spot-buys

2) Selling - Seller-Centric Web sites• Two product categories – perishable goods

and goods with depreciating value over time

Buyer-Centric Web SitesBenefits To Buyer

•Opportunity to increase competition for buying dollars •Better information about the marketplace •Enhance the RFQ process and compress cycle time •New supply management capability

Benefits To Seller

•Access to new customers •New and timely information on state of the market •Automating the RFQ process •New demand management capability

Seller-Centric Web sites

Reasons for businesses to establish online auctions:

Liquidate surplus inventory

Unload obsolete inventory

Provide an additional marketing channel

Off-load time sensitive products (ie. airline tickets)

Seller-Centric Web sites

Benefits To Seller (Company)•Enhanced revenues •Lowered costs and improved efficiency •Access to a larger and more diverse group of buyers •Real-time access to market demand information •New channel to dispose of aged, unused, or idle assets

Benefits To Buyer (Trade Partner)•Opportunity to lower price •Lowered cost and improved efficiency •Access to a larger and more diverse group of suppliers •Better information about the market conditions

B2B AuctionsThird Party Auction Site

• Auction established by third party• Surplus goods are taken on consignment

Proprietary Auction Site• May be open to the general public or limited to the existing customers (Ingram Micro’s Auction Block)• Set up own auction site using software or service (www.moai.com)

Trust How to build trust in the global B2B

market? According to Forrester Research, need to build “trust infrastructure” by offering insurance services to reduce risk of online commerce. Trust brokersUnderwritersInformation suppliersQuality assurers

Technologies: Proxies and Web Agents

Proxy BiddingBids are placed automatically on your behalfCurrently available on many auction sites, such as www.excite.com AgentsSoftware entities that have sufficient autonomy to carry out tasks with little or no human supervision and represents a particular owner

Proxy Bidding

Example: Opening Price is $36.00; Bid Increment $4.00.

On the Bid Entry page, enter Max Bid: $60.

Your bid is confirmed.Current Bid is:$36.00

The system processes your bid. You are winning at:$36.00

Initial Bid on Item

Proxy Bidding

Continuing from before , if another Bidder comes along…

On the Bid Entry page, they enter Max Bid: $52.00

The system processes the bid.Second Bidder is losing at: $52.00

You are winning at:$56.00

This Bidder's bid was maxed out because your first bid ($60.00)

Is higher. You are therefore winning at one increment above their

maximum bid ($56.00)

Competing Bid on an Item

Agents

Used to automate several of the most time consuming stages of the buying process

Different types of agents:Search Agent

Collaborative filtering

Comparison

Negotiation

Search Agents

Internet Auction List Auction Products Search allows you to search for products across multiple auction sites, including:YahooCollecting NationAmazonUbid

Collaborative filtering After identifying need to buy something,

agent assists in critical evaluation of products.

Enables consumers to narrow list of products that best meet their needs.

Recommends products through an automatic ‘word-of-mouth’ mechanism (by identifying shoppers with similar tastes)

Problems and Limitations

Time consuming to keep returning to site to ensure your bid is winningLocating desired items for biddingBidding for multiple items becomes tiresomeMust wait to find out if you’ve won

Bidder Behavior and Strategic Implications

Does the choice of auction format impact the outcome?

Does bidders’ response to certain kinds of uncertainty result in frenzied over bidding?

Do Reverse Auctions bring about results that are very different from the regular auctions?

The Winner’s Curse: A Problem of Overly Aggressive Bidding

0

5

10

15

Bids Valuation Spot

A Variety of Problems

When different goods are sold on a Dutch auction – there are two kinds of uncertainties that bidders experience: Which product will competitors select if they

win the auction? How many units will they (competitors)

specify when they place a winning bid? One study compared items in a Dutch

Auction and the same sold them separately in an English Auction one after another.

The results were that in the Dutch Auction, uncertainty amplifies the winner’s curse.

Buyer Run Auction Markets

MRO Goods Manufacturing Inputs

Spot Sourcing Maximum Gains suppliers will attempt to aggregate. Presence of a few large buyers can easily neutralize seller aggregation. Reverse Auction.

Buyers can create switching costs to lock in suppliers. Buyers’ supply risk can help suppliers protect profits. Sealed Bid – Reverse Auction.

Systematic Outsourcing

Buyers’ power diminishes as level of customization increases. Order fulfillment complexity offers suppliers opportunity to customize – “Deep Linking”. Reverse Auction for long term supply contracts – followed by stable prices.

Suppliers are strong. Buyer focus will be on mitigating supply risks. Buyers’ power decreases with increase in product complexity and specificity.

Supplier Run Auction MarketsMRO Goods Manufacturing Inputs

Spot Sourcing Buyers are very strong. Presence of Spot Markets can weaken seller’s pricing power. Suppliers will prefer to set up ascending auctions / first price sealed bid auction.

Buyers’ supply Risks may determine extent of seller gains. Descending Bid Auctions.

Systematic Outsourcing

Suppliers’ pricing power increases with extent of customization. Suppliers will attempt to erect entry barriers for other suppliers. Production capacity constraints may be the chief reason for auctions. Large, monopolistic suppliers will gain disproportionate revenue.

Suppliers’ gain increases with increase in product complexity and specificity. Buyer focus will be on mitigating supply risks. Descending bid / First Price Sealed Bid auctions for long term contracts – or multi-tier auctions.

A Summary of Auctions in B2B Markets

MRO Goods Manufacturing Inputs

Spot Sourcing

Buyers are relatively strongest. Reverse Auctions – Sealed Bid favor buyers. Limits to the effectiveness of Forward Aggregators.

Buyers stand to gain more than suppliers. Buyers Reverse Auctions Suppliers Descending Bid Auctions / Multi-tier English Auctions. Extent of supply volatility may determine buyer / seller gains.

Systematic Out-sourcing

Suppliers’ pricing power increases with extent of customization. Sealed bid reverse auctions for longer term contracts favors buyers. Opportunity for Forward Aggregators.

Suppliers’ pricing power is greatest. Descending Bid auctions. Product Specificity and Customization determine seller gains. Opportunity for Reverse Aggregators.