Stephen darori dynamic pricing

1Prentice Hall, 2002

Chapter 9

Dynamic Pricing:Auctions and More


Learning Objectives

Define the various types of auctions and list their characteristicsDescribe the process of conducting forward and reverse auctionsDescribe the benefits and limitations of auctionsDescribe the various services that support auctionsDescribe the hazards of e-auction fraud and countermeasuresDescribe bartering and negotiatingAnalyze future directions and the role of m-commerce


Electronic Auctions in Action

Illustrative examples:C2B reverse auctions: DM&SB2C and C2C forward auctions: Dell ComputersC2C forward auctions: all of us at eBay


Figure 9-1A Dell Product in an Auction


Fundamentals of Dynamic Pricing and Auctions

Fundamentals Traditional auctions

Last only a few minutes (short decision making time) and sellers may not get highest priceBidders may not get what they want

Electronic auctionsLike offline auctions, performed on PCHost sites act like brokersBuyers may solicit offers from potential sellers


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)


Figure 9-3English Auction, Ascending Price


Fundamentals (cont.)

Dynamic pricing and auctions (cont.)Yankee auctions—multiple identical items with a minimum bidDutch auctions—multiple identical items starting at high price and moving lower


Figure 9-4Computerized Auction Clock

for Dutch Flower Auctions

Source: Used with permission of aquarius-flora.com.



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

One buyer, many potential sellersMany sellers, many buyers



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 second bid (Vickrey auction)


Benefits

Benefits to sellers:Increase revenues by broadening customer base and shortening cycle timeOptimal price settingDisintermediation—sellers gain more customer dollars by offering items directlyBetter customer relationships—buyers and sellers have more time to interact, creating customer loyaltyLiquidation—sellers liquidate 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 pricesEntertainment—interaction in auction can be entertaining and excitingAnonymity—3rd party allows buyer anonymityConvenience—buyers trade from anywhere (even cell phone)


Benefits (cont.)

Benefits to auctioneers:Higher repeat purchase—auction sites garner higher repeat-purchase rates than e-commerce 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

Limited participationInvitation onlyOpen to dealers only

SecurityC2C auctions not necessarily secureB2B auctions conducted on highly secure private lines

SoftwareFew 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 onesEfficient way to find best price at electronic auctionsLow cost provision of exceptional levels of transparency of market to operation and product quality

Economic Impacts


Economic Impacts (cont.)

Strategic uses of auctions and pricing mechanisms (cont.)

E-auction markets are more efficient than traditional marketsE-auctions can provide services at low transaction costCustomers abandon a market that is not perceived as fairMust 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 activityDelay in price response causes greater potential for feedback loops and instabilitiesOrder-driven e-auction markets demand that markets clearly define when a sale has been made



Impacts Auctions as a coordination mechanism—establish equilibrium in priceAuctions as a social mechanism to determine a price

Offer special items at a single timeAttract considerable attentionAuctions provide exposure of purchase and sale orders—liquidity



Auctions as a highly visible distribution mechanism

Deals with special offersUse the mechanism to attract customers

Bargain huntersHave preference for gambling dimension of auction process

Auction as a component in e-commerce


Figure 9-6The Components of Auctions

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


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 requestsC2B reverse auction—vendors submit offers and lowest-priced vendor gets the job

“Name-Your-Own-Price” C2B Model


“Name-Your-Own-Price”C2B Model (cont.)

Other modelsSavvio.com—model for travelers

Real-time declining-price auctionFull disclosure of itinerary detailsDiscounted international and domestic air travel and cruise tickets

Asiatravel.com allows travelers to place an RFQ, then asks vendors to bid on it


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 worldwideYahoo!’s auction list—400 auction-related linksBidder’s Edge—searches eBay, Yahoo, Amazon for specific itemsTurbobid—provides mega-search series that helps local bidders find items from a pool of e-action sites


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 auction

NamesUser IdsPasswords

Buyers can check seller’s profileListing and promoting



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



PricingTo 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


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 notificationsEnd-of-auction noticesSeller noticesPostcards and thank-you notes

User communicationChat groupsMailing listsMessage boards

Feedback and rating



Phase 4: Post-auction follow-up (cont.)Pricing and billingPayment methods

Electronic transfer serviceEscrow serviceCredit-card payment

Shipping and postageInternet shippersInternet postage


Figure 9-7The Process of E-Auctions



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 TaiwanConducted on private networks more than 10 yearsForward auction of pigs that are brought to a physical site while data is displayed to biddersComputers monitor bidder’s financial capability


Auctions on Private Networks (cont.)

Cars in Japan’s AucnetAuctioned used cars to dealers on televisionMoved to private network, then on to Internet and into the U.S. but closed in 1998Today in Japan these auctions sell:

Computer hardwareSoftwareServices like insurance and leasing

Livestock 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, Bundle Trading, and Pricing Issues


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 sellersManagement and operation of bundle markets is complex and differs considerably from single or double auction markets


Double Auctions, Bundle Trading, 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, Bundle Trading, 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


Bartering—exchange of goods and services

Bartering exchangesGive your offer to intermediaryIntermediary asses value of your product or service in”points” Use “points” to buy what you need

Bartering sites must be financially secureAlternative to bartering is to auction surplus and then use the money collected to buy items needed

Bartering Online


Negotiating and Bargaining Online

Dynamic prices can be determined by negotiationNegotiated prices result from interactions and bargaining among sellers and buyers

Expensive items like cars and real estateDeal with nonpricing terms like payment method and credit


Negotiating and Bargaining Online

Three factors that facilitate negotiated prices

Intelligent agents that perform searches and comparisonsComputer technology that facilitates negotiation processProducts and services that are bundled and customized


Negotiating and Bargaining Online (cont.)

Technologies for bargainingSearch—gathering information about products, services, potential vendors and customersSelection—processing and filtering information in order to select a product and trading partnerNegotiation—interactions with bids, offers, agreements, and contractsContinuing selection and negotiation—repeated sequentially until an agreement is reachedTransaction completion—payment and delivery


Benefits of online auctionsConvenience and ubiquitySimpler and fasterPrivacy

Limitations of online auctionsVisual qualityMemory capacitySecurity

Mobile Auctions


General auctions—face regular problems of selling online in international environmentSelling art online in real-time auctions—allows real-time auction bidding and partners with eBayStrategic alliances—major impact on competition and industry structure

Future of Auctions


Managerial Issues

Your own auction site vs. a third-party siteCost benefit analysisAuction strategiesSupport servicesPayment


Managerial Issues (cont.)

Controlling what is auctionedChange agentBuilding auction applicationsBarteringBuilding auction sites


Figure 9-9Components of a Comprehensive Auction Site


Figure 9-10Integrated Auction Business Model

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Stephen darori dynamic pricing