Internet Auction


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Internet Auction

  1. 1. Auction mechanisms and Internet auction Chia-Liang Hung 20004,10,15
  2. 2. Contents <ul><li>Types of auction mechanism </li></ul><ul><li>Purposes of Internet auction pricing </li></ul><ul><li>Internet auction model </li></ul><ul><li>Principles of efficient mechanism designing </li></ul>
  3. 3. What is an auction? <ul><li>An auction is a market institution with an explicit set of rules determining resource allocation and prices on the basis of bids from the market participants, including both seller of offering and buyer of bidding. </li></ul><ul><li>The word “auction” is derived from the Latin augere , which means “to increase.” </li></ul>
  4. 4. The purpose of auction <ul><li>Why are auctions used rather than other selling approaches such as the fixed/menu price? </li></ul><ul><ul><li>Heterogeneous value—the price, that is the willingness-to-pay , depends on the demand and supply conditions at a specific moment of time, and a specific spot of place </li></ul></ul><ul><ul><li>Resolution of information asymmetry—promote many competitors to reveal truth </li></ul></ul>
  5. 5. Some auctioning mechanisms <ul><li>English auction </li></ul><ul><li>Dutch auction </li></ul><ul><li>Reverse auction </li></ul><ul><li>First-price sealed-bid auction </li></ul><ul><li>Second-price sealed-bid auction </li></ul><ul><li>Multi-unit auction </li></ul><ul><li>Yankee auction </li></ul><ul><li>Double auction </li></ul><ul><li>met de borden—arbitrational auction </li></ul>
  6. 6. English- vs. Dutch auction <ul><li>Repeated competitive games </li></ul><ul><ul><li>English auction—an ascending -bid auction that is usually used for selling goods through raising and posting price openly. E.g., antiques and artwork </li></ul></ul><ul><ul><li>Dutch auction—a descending -bid auction that starts by the auctioneer’s initial high price and then lowers the price down until one bidder accepts the current price. E.g., flowers in Netherlands, fish in Island, tobacco in Canada </li></ul></ul>
  7. 7. Options of English auction <ul><li>Initiate price </li></ul><ul><ul><li>Does the $1 bidding game extract more benefit? </li></ul></ul><ul><li>Reserved price—the seller’s bottom line </li></ul><ul><ul><li>Is it proper to reserve the draw-back right at the end of game? </li></ul></ul><ul><li>Forestall price—in other words, an open reserved price </li></ul><ul><ul><li>The effect of forestall? </li></ul></ul><ul><li>Markup range </li></ul><ul><ul><li>% of initiate price or arbitrary setting </li></ul></ul><ul><li>History-tracing—the whole historical log or the latest? </li></ul><ul><li>Snipping agents </li></ul><ul><ul><li>The influence of automatic price snipping? </li></ul></ul><ul><li>Auto-extension—prevention of wait-and-see holding </li></ul>
  8. 8. Empirical testing on the auction behavior of G2HK *(0.827) *(96.2) *(55.2) *(-0.547) *(-408) *(0.984) +* +* +* +* *(- 0.00767) * (0.0235) *(-0.000444) Starting price Markup ratio Reservation option Forestall option Agent option Duration Bids Ending price Deal Browses +*
  9. 9. Reverse auction <ul><li>A repeated descending-bid auction is launched by the buyer to invite the sellers’ participation. </li></ul><ul><ul><li>E.g.,, </li></ul></ul><ul><ul><li>much lower the bidding price, much better the buyers’ utility </li></ul></ul><ul><li>cf. , Dutch auction </li></ul><ul><ul><li>Much lower the auctioning price, much inferior the sellers’ benefit </li></ul></ul>
  10. 10. First-price vs. second-price sealed bidding <ul><li>One-shot game simultaneously </li></ul><ul><ul><li>First-price sealed-bid auction—the bidder is awarded the sold object in expense of the submitted highest price. (Dutch equivalence) </li></ul></ul><ul><ul><ul><li>E.g., the government sells the land or the mineral right </li></ul></ul></ul><ul><ul><li>Second-price sealed-bid (or Vickrey) auction—the bidder is awarded the sold object by submitting the highest price but in expense of the submitted second-highest price. </li></ul></ul><ul><ul><ul><li>This approach was seldom used in practice even though it possessed a theoretical efficient property—much less incentive for bidders </li></ul></ul></ul>
  11. 11. The efficiency of Vickrey auction Price <ul><li>The bidding criteria: valuation ≥ bidding price </li></ul><ul><ul><li>A will win and always be charged less than his own valuation even though he had issued his maximum valuation price as long as his valuation is the highest among the competitors. </li></ul></ul>A’s valuation B’s valuation C’s valuation A’s price B’s price C’s price
  12. 12. The failed design of auctions <ul><li>First-price sealed-bid auction </li></ul><ul><ul><li>Revealed prices under the bidders’ true valuation—bidding price=[(n-1)/n] × valuation, n=# of participants </li></ul></ul><ul><ul><ul><li>more participants may close the gap </li></ul></ul></ul><ul><ul><li>Second-price sealed-bid auction (facilitated by some incentives) may cure the fallacy </li></ul></ul><ul><li>Dutch auction —the bidding price is usually lower than the true valuation of bidder </li></ul><ul><ul><li>Partitioning the game of one price for total objects into discriminatory sale for smaller number units </li></ul></ul>
  13. 13. Multi-unit auctions <ul><li>A repeated auction mechanism for exchanging several identical goods is used to be conducted on the commodity market </li></ul><ul><li>For a multi-unit auction, the necessary condition is the amount of bidders must be more than the auctioned objects </li></ul><ul><li>The supply side </li></ul><ul><ul><li>10-unit identical goods </li></ul></ul><ul><li>The demand side </li></ul><ul><ul><li>A, $100, 3 units </li></ul></ul><ul><ul><li>B, $95, 4 units </li></ul></ul><ul><ul><li>C, $92, 5 units </li></ul></ul><ul><ul><li>D, $90, 3 units </li></ul></ul>3 3 4
  14. 14. Different incentives of multi-unit auctions <ul><li>The individual bidding price vs. the last exchanged price </li></ul><ul><li>The supply side </li></ul><ul><ul><li>10-unit identical goods </li></ul></ul><ul><li>The demand side </li></ul><ul><ul><li>A, $100, 3 units </li></ul></ul><ul><ul><li>B, $95, 4 units </li></ul></ul><ul><ul><li>C, $92, 5 units </li></ul></ul><ul><ul><li>D, $90, 3 units </li></ul></ul>3 3 4 A, $100 X 3 B, $95 X 4 C, $92 X 3 or A, B, C, $ 92 X 10 Conservative & lower-valuation bidding behavior Truth revelation on individual bidding price
  15. 15. Dutch multi-unit auction <ul><li>The supply side </li></ul><ul><ul><li>10-unit identical goods </li></ul></ul><ul><li>The demand side </li></ul><ul><ul><li>$100, —, 10 units </li></ul></ul><ul><ul><li>$99, —, 10 units </li></ul></ul><ul><ul><li>$98, (A/5 units), 5 units </li></ul></ul><ul><ul><li>$97, —, 5 units </li></ul></ul><ul><ul><li>$96, (B/3 units), 2 units </li></ul></ul><ul><ul><li>$95, (C/2 units), 0 units </li></ul></ul><ul><li>An descending-bid multi-unit auction that starts by the initial high price and then lowers the price until all products had been selected by the bidders’ prices. </li></ul><ul><ul><li>The agricultural commodity auction— immediate demand and short-duration goods </li></ul></ul>
  16. 16. Hog auction market by Dutch auction
  17. 17. Yankee auction <ul><li>A multi-criteria matching mechanism </li></ul><ul><ul><li>Prioritize the allocation by the quantity, the issued time, credit rating, or other signals </li></ul></ul><ul><ul><li>Apply especially on the multi-unit auctions </li></ul></ul><ul><li>The supply side </li></ul><ul><ul><li>10-unit identical goods </li></ul></ul><ul><li>The demand side </li></ul><ul><ul><li>A, $100, 3 units </li></ul></ul><ul><ul><li>B, $95, 4 units </li></ul></ul><ul><ul><li>C, $95, 5 units </li></ul></ul><ul><ul><li>D, $90, 3 units </li></ul></ul>3 5 2
  18. 18. Double auction (i) <ul><li>Several sellers and several buyers submit bids simultaneously , especially on the stock exchanges and commodity markets </li></ul><ul><li>A sealed-bid matching process promotes transactions to occur only when the sellers’ prices less than the buyers’ prices. </li></ul><ul><li>The sellers could not raise their own prices too high to match the buyers’ expectation, while the buyers would not post too low bidding prices to attract the sellers. </li></ul><ul><li>E.g., B2B Internet auction for trading the industrial materials </li></ul>
  19. 19. Double auction (ii) <ul><li>The demand side </li></ul><ul><ul><li>A, $100, 20 units </li></ul></ul><ul><ul><li>B, $90, 30 units </li></ul></ul><ul><ul><li>C, $85, 40 units </li></ul></ul><ul><ul><li>D, $80, 30 units </li></ul></ul><ul><li>The supply side </li></ul><ul><ul><li>a, $75, 30 units </li></ul></ul><ul><ul><li>b, $80, 25 units </li></ul></ul><ul><ul><li>c, $85, 20 units </li></ul></ul><ul><ul><li>d, $90, 30 units </li></ul></ul><ul><li>The matched outcomes with average prices </li></ul><ul><ul><li>A-a, $87.5, 20 units </li></ul></ul><ul><ul><li>B-a, $82.5, 10 units; B-b, $85, 20 units </li></ul></ul><ul><ul><li>C-b, $82.5, 5 units; C-c, $85, 20 units </li></ul></ul>20 10 20 5 20
  20. 20. Double auction (iii) <ul><li>If there are sufficiently many buyers and sellers , there would be no other trading mechanism the could increase some traders’ expected gains from trade without lowering the others’ expected gains down—an efficient state so called “ Pareto Optimality” </li></ul>
  21. 21. Stock exchange—a case of double auction The last exchanged price 20 20 -50.5 33 441 20   51 5 408 20   51.5 22 403 20   52   381 20   52.5 99 381 23 3 53   282 36 13 53.5 30 282 56 20 54   252 111 55 54.5 57 252 157 46 55   195 172 15 55.5 10 195 192 20 56 23 185 217 25 56.5   162 253 36 57   162 57.5 347 94   162 162 cumulative selling selling price board buying cumulative buying
  22. 22. Stock exchange—a case of double auction (cont.) The revealed selling price for the next stage The revealed buying price for the next stage     -50.5 33 256     51 5 223     51.5 22 218     52   196     52.5 99 196     53   97     53.5 30 97     54   67     54.5 57 67     55   10     55.5 10 10 7 7 56     32 25 56.5     68 36 57     162 94 57.5     cumulative selling selling price board buying cumulative buying
  23. 23. met de Borden auction <ul><li>Arbitrational auction </li></ul><ul><ul><li>Both sellers and buyers can be the auction initiators to issue the bidding to the arbitrator </li></ul></ul><ul><ul><li>Announce the auction item (property and quantity) </li></ul></ul><ul><ul><ul><li>Selling auction—looking for the candidate buyer </li></ul></ul></ul><ul><ul><ul><li>Buying auction—looking for the candidate seller </li></ul></ul></ul><ul><ul><li>Compromise the disperse prices between the seller’s and the buyer’s based on the general market price </li></ul></ul><ul><ul><li>Open the arbitrated price and charge the arbitration commission even though the initiator had retreated the auction at the end </li></ul></ul><ul><li>Immediately timely auction </li></ul>
  24. 24. The buyer views of Internet pricing <ul><li>Enabling by search engine </li></ul><ul><ul><li>Convenient </li></ul></ul><ul><ul><li>Fast </li></ul></ul><ul><li>Time-saving </li></ul><ul><ul><li>Self-service </li></ul></ul><ul><ul><li>One-stop shopping </li></ul></ul><ul><ul><li>Real-time comparison </li></ul></ul><ul><li>Energy-saving </li></ul><ul><ul><li>Quick browsing </li></ul></ul><ul><ul><li>Automation </li></ul></ul><ul><ul><li>Integration—brick & click </li></ul></ul>
  25. 25. Seller views of Internet pricing <ul><li>Pricing objectives </li></ul><ul><ul><li>From profit-based objective to market-share-based and competitive-based objective </li></ul></ul><ul><li>Marketing mix </li></ul><ul><ul><li>Be consistent between online and offline dealing </li></ul></ul><ul><li>Cost structure </li></ul><ul><ul><li>(+)The last-mile distribution, affiliation, customer acquisition cost (CAC) </li></ul></ul><ul><ul><li>(-)inventory, overhead, distribution of digit product, online customer service, e-mailing promotion, order processing </li></ul></ul>
  26. 26. Internet online auction <ul><li>Product category—primarily limited to consumer products </li></ul><ul><ul><li>Computer h/w & accessories, computer s/w, consumer electronics, sporting goods, toys,… </li></ul></ul><ul><ul><li>More than 5 products offered on a general auction site </li></ul></ul><ul><li>Business model—most focused on C2C(eBay) or B2C(uBid), less for B2B (for quality consideration) </li></ul><ul><ul><li>Special case—C2B, a reverse call for auction, e.g., & TravelBids </li></ul></ul>
  27. 27. Internet auctioning rules and webs <ul><li>Most adopted the English/straight type of auction for a specific single item, or Yankee type multi-unit auctions </li></ul><ul><li>Few adopted the Dutch auction </li></ul><ul><ul><li>Intermodal Exchange for vessel container </li></ul></ul><ul><ul><li>Klil-Klok for three-minute auction </li></ul></ul><ul><li>The most innovative & popular auction rule is reverse auction driven by the buyer </li></ul><ul><ul><li>A high potential business of mobile commerce </li></ul></ul><ul><li>Few adopted the double auction on B2B model </li></ul><ul><ul><li>FastParts for electronics parts </li></ul></ul><ul><ul><li>LabX for laboratory experimental equipments </li></ul></ul><ul><ul><li>Dallas Gold for jewelry (commodity) </li></ul></ul>
  28. 28. Innovative bidding agents <ul><li>The clients setup the maximum bidding amount to the agent without monitoring the auction activities, then the latter will continue to enter the lowest winning bid until the maximum bid is met. </li></ul><ul><li>Cross-website swapping agents </li></ul><ul><ul><li>E.g.,,, Bidder’, RU, etc </li></ul></ul><ul><li>Problems of infringing privacy and copyright </li></ul>
  29. 29. The revenue flow of internet auction site <ul><li>As an intermediary for aggregating information </li></ul><ul><ul><li>e.g., eBay on C2C, or FairMarket on B2B for computer electronics </li></ul></ul><ul><ul><li>Insertion fee for listing an item </li></ul></ul><ul><ul><li>Final value fee—as commission charged only when goods had been successfully sold </li></ul></ul><ul><li>As a seller for online retailing, e.g., uBid </li></ul><ul><ul><li>Quantity discount compensation </li></ul></ul><ul><ul><li>Advertisement fee </li></ul></ul>
  30. 30. Internet Auction: Schematic Business Model Internet Auction Buyer 1 $ i Seller 1 $ $ Listing Fee, commission $ Ally e.g., eBay Seller 2 Buyer 2 i $ o o i i Chat rooms, Feedback forum, email O: objects flow $: money flow i: information flow
  31. 31. The possibility to auction <ul><li>The degree of information asymmetry between two sides </li></ul><ul><li>The credibility of commitments—of sellers as well as of buyers </li></ul><ul><ul><li>Safeguard promise vs. bonding cost </li></ul></ul><ul><li>The potential damage of reneges </li></ul><ul><ul><li>The importance of futurity—reputation, punishment & enforcement cost </li></ul></ul>
  32. 32. The successful factors of Internet auctions <ul><li>The right products— </li></ul><ul><ul><li>Standardized , non-perishables, commodities, etc, for large sale volume and reputation spillover </li></ul></ul><ul><ul><li>Collectibles, local/timely information for niche of special offerings </li></ul></ul><ul><ul><li>Lower degree of information asymmetry </li></ul></ul><ul><ul><ul><li>Credible safeguard & easy enforcement </li></ul></ul></ul><ul><li>The innovative/proper auction rule </li></ul><ul><ul><li>The demand attitude, the transaction mechanism </li></ul></ul><ul><li>Promotion effort for attraction </li></ul><ul><ul><li>Leverage with allies, e.g., portals and retailers </li></ul></ul>
  33. 33. The incentive principles: IR & IC <ul><li>IR (individual rationality) </li></ul><ul><ul><li>the auction game must be attractive enough to induce participation </li></ul></ul><ul><li>IC (incentive compatibility) </li></ul><ul><ul><li>the auction game should be deliberately designed to guide the participants to act like what the auctioneer wanted or to reveal truth for rewarding something compensated by the auctioneer </li></ul></ul>
  34. 34. Conclusion <ul><li>As an auction designer </li></ul><ul><ul><li>Arrange your auction mechanism </li></ul></ul><ul><ul><ul><li>IR condition </li></ul></ul></ul><ul><ul><ul><li>IC condition </li></ul></ul></ul><ul><ul><li>A flexible all-in-one platform (a forthcoming experiment on the site of Youthwant) </li></ul></ul><ul><ul><li>The potential utility of auctioning over the mobile network </li></ul></ul><ul><li>As a bidder </li></ul><ul><ul><li>Select an efficient auctioning approach with proper options for retaining surplus </li></ul></ul>
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