Re-engineering the Dutch Flower Auctions

Reengineering the Dutch Flower Auctions:
A Framework for Analyzing Exchange
Organizations
Ajit Kambil • Eric van Heck
Information Systems Department, Stern School of Business, New York University, 44 West 4th Street,
New York, New York 10012
akambil@stern.nyu.edu
Department of Decision and Information Sciences, Rotterdam School of Management, Erasmus University Rotterdam,
P.O. Box 1738, 3000 DR Rotterdam, The Netherlands
eheck@fac.fbk.eur.nl

T his paper specifies a generalizable model of exchange processes and develops a process-
stakeholder analysis framework to evaluate alternative market designs. This framework
is applied to analyze a number of information technology initiatives in the Dutch flower mar-
kets. The Dutch flower auctions are the world’s leading centers for trading cut flowers and
potted plants. We undertake a cross-case analysis and apply our framework to analyse suc-
cesses and failures in the introduction of new IT-based trading mechanisms in these markets.
Based on our study, we develop a number of testable propositions on: the separation of physi-
cal and informational processes in trading, the responses of stakeholders to changes in avail-
able information due to IT initiatives, and economic and incentive conditions required for
adoption of new trading processes. Finally, our detailed cases illustrate the institutional and
incentive constraints, and complexities encountered in the introduction of new electronic
markets.
(Electronic Markets; Transaction Costs; Reengineering; Technology Adoption)

1. Introduction traders’ bounded rationality and market uncertainty,
combined with the potential for opportunism given the
Information technology enables new ways of coordi-
divergent interests of different market participants
nating the exchange of goods and services. Improved
(Williamson 1975, 1985). Markets and other gover-
communications and processing systems, such as the
Internet and video conferencing, allow individuals and nance mechanisms provide specific information pro-
organizations to radically re-engineer existing trading cessing capabilities to exchange parties and serve to
processes enabling new forms of electronic commerce generate information and trust to reduce the uncer-
and markets. tainty and risks inherent in the exchange process
Markets are real or virtual meeting places where (Kambil 1992). To reduce uncertainty and risk, markets
buyers, sellers, and intermediaries meet to exchange or as institutions provide specific routines and proce-
transfer property rights from one party to another. dures for coordination, and for the information and
Typically, buyers and sellers confront many different guarantees that enable the buyers and sellers to un-
uncertainties and risks in trading. These include the dertake the exchange.
inability to forecast or plan for the future given the Prior research on the effects of information technol-

1047-7047/98/0901/0001$05.00
Copyright 1998, Institute for Operations Research Information Systems Research
and the Management Sciences Vol. 9, No. 1, March 1998 1

KAMBIL AND VAN HECK
Reengineering the Dutch Flower Auctions

ogy (IT) on exchange organizations and processes typ- structure and benefits of different markets for various
ically applied transaction costs and agency theory to stakeholders. Building on transaction costs and
predict shifts from hierarchies toward market or other information-processing models (Galbraith 1974,
intermediate forms of organizations (Bakos 1991a, Tushman and Nadler 1978), this paper provides both
Johnston and Lawrence 1988, Malone et al. 1987, a model of key exchange processes and a process-
Powell 1990). A central argument of these articles was stakeholder analysis framework for comparing across
that information technology would improve commu- different market structures. Such a framework is im-
nications, searches, monitoring, and information- portant to managers who must select and design new
sorting capabilities to reduce transaction costs and al- trading models. It is also important to researchers who
low purchasers to take advantage of production econ- want to develop models of how information technol-
omies available in markets. A critical drawback of this ogy affects exchange organizations and create theories
analysis was the definition of markets in abstract eco- that can be generalized across cases. We illustrate and
nomic terms (i.e., markets coordinate economic activ- apply this framework to evaluate different electronic
ity through a price mechanism) without consideration commerce initiatives in the Dutch flower markets. The
for differences in market organization. For example, framework for analysis developed in this paper can
some different market types include direct search mar- apply to the analysis of other market structures.
kets where partners directly seek each other out (e.g.,
a typical retail fruit and vegetable market), brokered
markets where exchange parties employ agents to seek 2. Exchange: A Process Stakeholder
compatible partners (e.g., private placement offerings Analysis
by investment banks), dealer markets where dealers as Exchange is a critical subject of study in marketing,
intermediaries hold, buy, and sell product inventories economics, finance, and information systems. Building
(e.g., NASDAQ), and auction markets where traders on these disciplines, information systems researchers
transact directly through a centralized intermediary have typically adopted a number of outcome dimen-
(e.g., Sotheby’s art auctions). Each of these mecha- sions to characterize and evaluate markets. For exam-
nisms organizes the trading process and related infor- ple, Clemons and Weber (1990) characterize financial
mation processing activities in different ways. Thus, markets in terms of liquidity, volatility, and transpar-
we can expect the impact and role of IT can vary across ency. Liquidity is the ability of the market to absorb
types. large orders without significant price changes, indicat-
More recently, information systems researchers have ing the depth and extent of market participation by
examined the impact of information technology on buyers and sellers. Volatility refers to the variance in
market institutions. Konsynski et al. (1989, 1990, 1992) day-to-day volumes and prices, and transparency re-
provided a number of descriptive case studies of elec- fers to keeping the widest group of buyers informed
tronic markets providing a rich case base for research. on current prices and allowing them access to trading.
Clemons and Weber (1990, 1991) examined the effects Highly liquid markets with low volatility and high
of computerization on the London Stock Exchange, transparency provide stable forums for exchange.
and Lee (1993) provided a technology to support order While these outcome characterizations of different
matching of complex products. These studies begin to market institutions are important, they are not easily
consider the importance of different market types and generalizable across settings. For example, liquidity is
institutional histories. a key indicator of market quality for financial markets
Despite the increasing number of cases on electronic but it is an inappropriate measure in the case of Dutch
markets, a common language and categorization of flower auctions. First, the size of any one flower order
key processes in a trading system is lacking. Such a is limited, so it is hard to evaluate the impact on price
categorization is a precondition to building a frame- of large orders. Second, the flowers are sold from the
work to systematically evaluate and compare the auction to the buyer without further resale among the

Information Systems Research
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KAMBIL AND VAN HECK

buyers. Common outcome characterizations such as li- ications and computing, product representation, legit-
quidity do not apply to all market exchange relations. imation, influence, and dispute resolution). The basic
Outcome characterizations also do not help managers trade processes are distinct processes required in all
evaluate the potential impact of a new information transactions of goods and services. The trade context
technology innovation on the operations of a trading processes facilitate and enable or reduce the costs of or
system, or the costs and benefits to different “frictions” in the basic processes. Figure 1 illustrates
stakeholders. these processes, which are defined and discussed in
A model of key exchange processes is necessary to Tables 1 and 2.
provide a reference point for comparing the organi- The ten process categories described in Tables 1 and
zation of different market institutions. Traditional pro- 2 provide parties to an exchange relation with the in-
cess classifications of exchange include search, bar- formation processing, coordination, and influence
gaining and negotiation, monitoring, and enforcement mechanisms required to mitigate uncertainty and
processes (Coase 1960, Dahlman 1979).1 However, this exchange-related risks. While we cannot prove that
level of classification does not provide sufficient detail our categorizations define all processes related to ex-
for the comparison of alternative market structures. change, we propose that these categories define the key
What is required is a classification of exchange pro- processes underlying trades. The categories allow sys-
cesses that is generalizable, focuses attention on salient tematic identification of processes affected by a specific
dimensions of an exchange relation and provides suf- administrative or technological innovation and enable
ficiently detailed information for effective classifica-
us to systematically examine and represent the impacts
tion of exchange features into independent process
of information technology across interdependent pro-
categories. We adapt work by Kambil (1992) to build
cesses and stakeholders in an electronic market.
such a classification scheme grounded in transactions
The implementation and operation of the above pro-
cost and information-processing theories.
cesses and systems create transaction costs for different
2.1. A Model of Exchange Processes stakeholders to the exchange. Transaction costs and
Kambil (1992) identifies ten distinct processes that can the complexity of these processes increase as products
operate in an exchange relation, providing a basis for and production become more complex, and as the mar-
a finer grained analysis of market structure and costs. ket environment becomes more uncertain. Transaction
This categorization also recognizes that basic trade costs also increase as exchange parties establish more
processes exist within a wider context of support pro- complex mechanisms to defuse opportunism risks.
cesses that implement dispute resolution, and other Traditional economics postulate that firms will choose
mechanisms to ensure that counterparties to trades to organize exchange relations so that they achieve the
will meet their obligations. We adopt, refine, and lowest possible combined transaction and production
extend his model into five trade processes (search costs. This would suggest the trading mechanisms
valuation, logistics, payments and settlements, authen- with the lowest sum of transaction costs across all the
tication) and five trade context processes (commun- processes will evolve and dominate the market. How-
ever, real-market institutions are complex, constituting
1
Coase (1960) states for “a market transaction it is necessary to dis- a meeting point for stakeholders with both convergent
cover who it is one wishes to deal with, inform people that one
and divergent interests. Innovations by a specific
wishes to deal and on what terms, conduct negotiations leading up
to a bargain, to draw up a contract, to undertake the inspection stakeholder may reduce overall transactions costs but
needed to make sure that terms of the contract are being observed can increase the costs to other parties. This can result
and so on.” This specifies a minimum of three sequential activities: in the failure to adopt a specific technology or admin-
search to gather information and determine products and parties to
istrative innovation in the marketplace. Thus we pro-
transactions; bargaining and negotiations to determine the terms of
exchange; and the construction and adoption of monitoring, polic-
pose the need for a process-stakeholder analysis to sys-
ing, and enforcement mechanism to ensure parties will satisfactorily tematically evaluate the effects of technological
perform the exchange. innovations on specific processes as well as costs and

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KAMBIL AND VAN HECK

Figure 1 Exchange Processes

Reprinted by permission from: “Doing Business in the Wired World,” Ajit Kambil, IEEE Computer, May 1997. IEEE 1997.

benefits that arise from the innovation on different Annual sales of the seven Dutch flower auctions ex-
stakeholders. ceeded $2.9 billion U.S. in 1996.
Below we develop and illustrate the utility of a The flower auctions use the “Dutch” auction method
process-stakeholder analysis in focusing attention on for price determination. This method uses a clock, with
critical features of trading mechanisms, by using it to the clock hand starting at a high price determined by
systematically represent and evaluate the effects of the auctioneer and dropping until a buyer stops the
various information technology initiatives in the Dutch clock by pushing a button to bid for a lot at the price
flower auctions (DFA). determined by the clock hand. This method was in-
vented by a Dutch cauliflower grower in the 1870s to
trade agricultural products. It reduces the time spent
by growers at markets and frees them from the task of
3. The Dutch Flower Auctions
bidding and price determination, thereby allowing
The Netherlands is the world’s leading producer and them to focus on production. It also reduces the time
distributor of cut flowers and potted plants. This in- buyers spend in bidding or bargaining for goods.
dustry consists of about 11,000 growers and nearly The flower auctions provide a central location for the
5,000 buyers. Growers typically are family businesses, meeting of buyers, with suppliers allowing for effi-
while buyers represent both large and small wholesal- ciencies in quality control, logistics, and product re-
ers and retailers. The Dutch dominate the world export distribution. Flower Auction Aalsmeer (VBA) near
markets, with 59% world market share for cut flowers Schiphol airport and the Flower Auction Holland
and 48% world market share for potted plants in 1996. (BVH) near Rotterdam are located close to major trans-
The Dutch flower auctions established and owned by portation facilities and have some of the largest com-
grower cooperatives play a vital role in Holland’s lead- mercial buildings in the world. Both auctions spread
ership of this industry by providing efficient centers across the equivalent of about 100 soccer fields, each
for price discovery, and the exchange of flowers be- with the capacity to host 2,000 buyers. At the VBA the
tween buyers and sellers. The world’s two largest flower auctions occur in different auction rooms under
flower auctions are the Flower Auction Aalsmeer 13 different clocks. The computerized clock in the auc-
(VBA) and the Flower Auction Holland (BVH) in Hol- tion hall provides buyers with information on the pro-
land. These auctions trade over 30 million flowers and ducer, product, unit of currency, quality, and mini-
conduct nearly 60,000 transactions daily, generating mum purchase quantity. The flowers are transported
together over $2.4 billion U.S. in annual sales of cut through the auction hall and shown below the clock to
flower and potted products from the Netherlands and buyers. When the buyer stops the clock, the auctioneer
other producers such as Israel, Kenya, and Zimbabwe. uses the intercom to ask the buyer how many units of

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Table 1 Description of Basic Trade Processes

Process Description of Basic Trade Processes

1. Search The information gathering and evaluation process undertaken by buyers and sellers to identify opportunities. A trading
opportunity consists of a supplier willing to offer a good and a buyer interested in purchasing the good. Thus search
processes identify potential suppliers, goods, and customers willing to purchase the goods. Different market
mechanisms implement varied methods and venues to identify trading opportunities. Different search methods allocate
different search costs to buyers, sellers, or intermediaries.

2. Valuation (Price The process and methods of negotiating and discovering a purchase or sale prices for a product. A variety of different
Negotiation) price discovery and bidding processes exist that differentially attributes costs to buyers, sellers and intermediaries. For
example, various auction methods are specified in Davis and Holt (Davis and Holt 1993) for finding prices. Price
discovery mechanisms can also be biased to shift surplus from the trade to specific transaction stakeholders.

3. Logistics The processes specifying and coordinating the actual delivery of goods from the seller to buyer. Again, in a trade the
direct costs of delivery may be assumed differently by different players.

4. Payment and Settlements These processes define the terms and methods of payment permitted and ensure the settlement of payments in the
exchange. Third parties often provide the infrastructures for exchange.

5. Authentication This is a core set of activities used to verify the quality and features of the product offered, the authenticity of the trading
parties, and monitor conformance to the contract or agreement among parties. Authentication may involve third parties
who provide credit check, notarization, and other services to reduce the uncertainty of buyers and sellers.
Authenticating the quality of a product prior to purchase mitigates against adverse selection risks (Akerlof 1970, Klein
et al. 1978). Monitoring processes in a complex transaction work to ensure that the trade is successfully completed
and mitigate against moral hazard risks. Third parties to the transaction may play a critical role in monitoring
transactions, ensuring nonrepudiation and completion of agreements.

a lot he or she will purchase. The buyer provides the different stakeholders. A case method was used be-
bid and, when the bid is accepted, the clock is reset cause it enables rich data and “reality” to be captured
and the process is re-started to clear the remaining in- in greater detail than other methods. The case method
ventory. The auctioneer may introduce a new mini- also permits us to consider a greater number of ex-
mum quantity to ensure the entire lot clears. Each clock planatory variables. We then undertook a cross-case
can handle nearly 1,000 transactions an hour (approx- analysis on multiple IT initiatives in the Dutch flower
imately one transaction in four seconds). On average, markets to generate propositions that explain the suc-
15 million flowers are traded daily at the VBA in 30,000 cess or failure of specific innovations and more general
transactions. impacts of new information technologies on markets.
We investigated the use of information technology While we acknowledge that a single case cannot be
in these auctions over the span of three years, collect- generalized into a theory, a cross-case analysis is a use-
ing data through interviews with auction officials and ful step in theory construction by identifying patterns
participants and through review of all relevant pub- that provide testable propositions (Eisenhardt 1989,
lished reports and archival material. Next we used the Yin 1981).
process categories identified in the previous section to 3.1. An Evaluation of the Traditional Dutch
organize the information and systematically evaluate Flower Auction
or compare the impacts of specific IT innovations and Utilizing the previous process categories, Table 3 sum-
process changes on different stakeholders in the DFA. marizes the key features, strengths, and weaknesses of
This process-stakeholder analysis was used to identify the traditional Dutch flower auction. This provides a
changes in benefits and costs of different exchange pro- baseline for comparision and evaluation of process
cesses, and the relative value of these innovations to changes enabled by information technology.

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Table 2 Description of Trade Context Processes

Process Description of Trade Context Processes

6. Communications and Communications and computing processes underlie and bind all trading processes. New communications capabilities in
Computing terms of richer media, faster transfer speeds, improved ease of use and lower infrastructure costs transform
coordination capabilities within and across trade processes. Similarly, improved processing, storage, input-output, and
software technologies, further transform the coordination and decision making capabilities of stakeholders in each
process. These transformations change the specific transaction costs and opportunity costs perceived by buyers,
sellers, and intermediaries.

7. Product Representation Product representation processes determine how the product attributes are specified to the buyer or other third parties.
To what extent is there a standardized product and quality specification language? Both the buyers’ and sellers’ costs
are reduced by informational standards or well-specified languages to represent the key quality, functional and
aesthetic attributes of the product. If the product is well represented, the uncertainty of the buyer is lower. The costs
and methods of implementing a uniform product representation scheme vary in different market mechanisms.

8. Legitimation This process is used to validate the trade or exchange agreement. It defines how bids, or agreements are recognized as
valid and binding commitments by exchange parties. In different trading situations, different procedures and rituals are
undertaken to legitimate a transaction. Often this is done by announcing the agreement, and participants to the
agreement, to a broader audience through a formal process.

9. Influence Structures and These processes implement mechanisms to enforce obligations or penalties to reduce opportunism risks. Kambil (1992)
Processes defines two distinct influence processes developed from social exchange and transactions cost theories. These are:
incentives and sanctions, and credible commitments. Incentives and sanctions include performance rewards for
completing a contract on time, or penalties for misrepresenting products, or denial of access to an exchange network.
A reputational system defines a special class of incentives and sanctions. Actions taken to enhance and create a good
reputation serve to create trust in the party. When a social system establishes a reputation as a valued asset to sellers
or buyers, opportunistic behaviour that can sully the reputation becomes more costly.
Investment in credible commitments (Williamson 1985) or asset-specialized investments by both exchange parties creates
hostages such that the loss of the relationship will create a significant cost for both parties. This serves to signal
commitment to the relationship by both parties and mitigates against opportunism risks. The types of commitments,
the importance of reputation, and institutional authority to create incentives and sanctions can serve to reduce risks
and the costs associated with other processes.

10. Dispute Resolution All exchanges occur in a broader legal or institutional context which provide various processes for resolving disputes
among parties and structures decision rights in the event of conflict. Firms may elect to directly resolve disputes
through negotiation, commit to third-party arbitration or court ordering of disputes. The latter is typically the most
expensive alternative. Dispute-resolution processes adopted in an exchange relation, and the allocation of decision
rights to structure solutions to disputes are crucial to reducing risks for buyers and sellers. Where goods are
exchanged, disputes can be resolved by replacement of a defective product, and warranty mechanisms.

The Dutch flower auctions provide buyers and sell- of nonstandard and unusual-value products (Milgrom
ers with a highly efficient infrastructure to support and Roberts 1990). By operating at a high clock speed,
exchange. As summarized in Table 3, they provide encouraging competition among buyers, and setting a
efficient search, communication, and product repre- fixed time by which to complete a transaction (or the
sentation capabilities for highly varied products. The clock goes to zero), the auction enables efficient trad-
auctions are also very efficient in determining price, ing. The hub and spoke operation and the logistics
enabling approximately 1,000 transactions per clock within the auction hall allow the timely transfer of a
per hour on a low-value good. The auction method large volume of flowers from suppliers to buyers. By
eliminates problems of haggling and reduces bargain- intermediating all buyer–grower exchanges, the auc-
ing costs that are otherwise associated with the trade tion also provides efficient quality control, settlement,

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Table 3 Features of the Traditional Dutch Flower Auctions

Exchange Process Implementation Strengths Weaknesses

1. Search All trading opportunities are found at the Search costs are reduced as the The buyers have to come to the auction
auctions. centralized auction aggregates major halls, and sellers have to deliver
trading opportunities in one location. products to the auction hall.

2. Valuation The Dutch auction clock method. Very efficient for small lot trading. All Auction prices for specific products
transactions occur in a fixed time slot decrease during the day. To assure
leading to 1,000 transactions per fairness, assignment of auction
hour. sequence for different growers is done
by lottery. Clock speeds and small lots
stretch the cognitive capabilities of
buyers favoring higher prices for
growers.

3. Logistics The auction facilities are a central hub Very efficient transfer of product from Packaging costs are incurred multiple
providing logistics support for seller to buyers. The centralized times—for transport to and from the
transferring products from sellers to auction trading allows specialization, auction. Multiple handling of flowers
buyers. These costs are shared among transportation, and other resources. can damage them.
all buyers.

4. Payments and The auctions provide systems for order Shared costs among auction participants
Settlements tracking, payments, and settlements and economies of scale in these
with efficient one-day settlement systems.
periods.

5. Authentication The auction house authenticates Very efficient for large numbers trading. Buyers and growers perceive quality
participants and grades the quality of The auction reduces counter-party grades as too broad, artificially
the products. It is also responsible for risks, product, and related inflating valuation of products at the
tracking and ensuring delivery of authentication costs for buyers and lower end of quality rating.
orders to buyers. sellers.

6. Communication and Simple visual communications of Efficient and low costs for shared Requires synchronous communications
Computing competitors, product, price, and other communications infrastructure. for trading, and colocation of parties
trading information on the clock. A to the limited trading floor. Growers
simple computerized system for do not know final demand patterns for
communicating bids. products.

7. Product The product is represented by itself, and Buyers can directly inspect the product Buyers and growers perceive quality
Representation simple codes identifying grower and a in the auction hall if they want to do grades as too broad. The cost of
gross level quality grade. so. visual inspection.

8. Legitimation The auction intermediary is responsible
for recording bids and legitimating
transactions.

9. Influence The auctions can exclude growers or The auctions, by centralizing and Auction rules tend to favor the growers.
buyers who do not meet various requiring the product to be delivered
criteria. prior to sale, minimizes opportunism
risks.

10. Dispute Resolution The auctions provide for various
arbitration mechanisms and rules for
resolving problems. This reduces
dispute resolution costs.

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KAMBIL AND VAN HECK

and dispute resolution mechanisms that mitigate in the flower industry created increasing demands for
against opportunism risks encountered by buyers and logistics support, space in the auctions and complaints
sellers. These features reduce transaction costs to about nearby traffic congestion. As the two major auc-
growers and buyers. tions were close to their limits in terms of complexity,
However, as summarized in Table 3, there are dis- capacity, and room to expand, increases in capacity
advantages of this specific model of trading. First, buy- would require changes in auction logistics or invest-
ers must be physically present at the correct location ment in new facilities. A second problem confronted
and correct time to bid on a specific product. In addi- by the industry was the consolidation of buyers into
tion, it is hard to simultaneously search other markets larger entities. Buyers for supermarkets and large retail
to estimate prices. Today, large buying organizations store chains wanted to purchase larger lot sizes and
provide cellular phones to their buyers to coordinate coordinate purchases across different markets to take
purchases across auctions. In response, the auctions advantage of the best price. Some large retailers, like
are beginning to coordinate trading similar products Marks and Spencer, were bypassing the Dutch auc-
at the same times in different auction houses. This will tions and their commissions to source directly from
allow the large buyers to find the best price across auc- growers in Spain and other countries. Third, the suc-
tions. The auction structure also inhibits growers from cess of the Dutch auctions as the world’s leading
understanding the true preferences of buyers, as grow- flower auctions and entry point into downtream logis-
ers are separated from the sale of their produce by the tics and distribution led to an increased flow of foreign
auction. cut flowers to the Dutch flower auctions. In 1994, 15%
Other disadvantages for specific stakeholders are of flowers traded at the largest Dutch Flower auctions
understood when we consider the auction’s ownership were imported from and re-exported to foreign coun-
and incentive structure. A number of auction rules fa- tries (sometimes back to the country of origin). This
vor growers, who are the auction owners, over buyers. increased foreign competition to Dutch growers, and
First, the clocks move at a high speed. Higher speeds in 1993 the import of foreign rose stems to the two
reduce the decision time available to buyers. This re- largest auctions reduced average prices by 40% during
sults in higher bid prices. The auctions have experi- the winter season. Subsequently, the Dutch grower co-
mented with different clock speeds and it is widely operatives voted to limit foreign access to the major
known that faster clock speeds result in higher prices. auctions in 1994. These challenges led to a number of
However, the auctions are unwilling to fully disclose successful and unsuccessful information technology-
the results of their experiments and selection of auction enabled transformations of trading in the industry.
clock speeds. Second, the auction rules and service These initiatives are critically examined below, using
costs to buyers for processing trades favors trading in a process-stakeholder analysis, to illustrate major pro-
smaller lots instead of purchases of large lots. This en- cess changes and benefits or costs of the initiatives to
sures that no one party can purchase the entire lot different stakeholders.
without competition. It also increases the cognitive
complexity and competition confronted by buyers.
Buyers must now purchase products and adjust pur- 4. IT-Enabled Dutch Auction
chasing decisions to availability across multiple clock
Transformations: A Process-
auctions. This imperfect information and low trans-
parency about available inventories favors growers, al- Stakeholder Analysis
though more empirical work needs to be done to dis- Four major information technology-enabled initiatives
cover the magnitude of the growers’ advantage. were undertaken to transform the Dutch flower auc-
tions and respond to the above challenges. Two un-
3.2. Challenges to the Traditional Dutch Auctions successful initiatives were the BVH’s Holland Vidi-
In the early 1990s the Dutch flower industry and auc- fleur system and the VBA’s Sample-Based Auction
tions faced a number of challenges. First, rapid growth (SBA) system. These initiatives promised to simplify

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auction hall logistics and add extra transaction capac- office provided a screen-based representation of the
ity to the auction. Two successful initiatives were the clock which was synchronized with the clock in the
Holland Supply Bank (HSB) system and the Tele auction hall.
Flower Auction System (TFA). The former system re- The Vidifleur experiment initiated by the BVH in-
sponded to the need of large buyers, and the latter pro- formation technology staff (Spooner and Copeland,
vided a new auction for foreign produce. While the 1992),2 was implemented with minimal changes to the
auctions have used information technology exten- original auction clock process. Experimenters con-
sively to support order processing, inventory, and lo- verted one of three auction clocks in a room to have
gistics, they primarily supported or automated exist- video screens for product display around the clock.
ing auction processes having impacts typically limited The auction also moved the real product under the
to the auction intermediary (Van Heck and Groen auction clock, providing a second visual display of the
1994). The IT-enabled initiatives discussed below fun- product. An auction room solely dedicated to this ex-
damentally changed the implementation or conduct of periment was unavailable because of the demand for
limited auction facilities, and altering existing logistics
one or more specific auction processes, and the way in
processes was deemed too expensive for the
which buyers, auctions, and sellers interact. Summary
experiment.
information on the initiatives is given in the Table 4.
Auctioneers expected this remote video auctioning
4.1. The Vidifleur Initiative to provide buyers with better information, as they
The BVH auction implemented the Vidifleur initiative could work from the comfort of their own offices and
in response to the growing capacity and logistics re- also access their office computers for purchasing, or-
quirements of the auction. Vidifleur intended to use der, sales, and local inventory information. The auc-
video auctioning to decouple the price determination tioneers also knew that buyers often tended to select
and logistics mechanisms and to allow buyers to trade goods from specific sets of growers rather than inspect
from outside the auction hall. When the product ar- the product in great detail and expand the selection of
producers. This buyer behaviour suggested that
rived at the auction a picture was taken, digitized, and
grower reputations played a substantial role in shap-
stored in auction computers. These computers trans-
ing purchases, and that the visual inspection of flowers
ferred the picture for display to a screen in the auction
hall, where buyers could bid for the product based on 2
Spooner and Copeland (1992) provide a teaching case of IT initia-
the image of the product. Buyers were also able to bid tives at BVH (previously called Flower Auction Westland) in which
for and look at the flowers on computer screens in their they discuss the motivation and technology used to implement the
private auction offices. The computers in the private Vidifleur experiment.

Table 4 Dutch Flower Auctions Initiatives

Traditional DFA Holland Vidifleur System VBA Sample Based Auction Holland Supply Bank Tele Flower Auction System

Start (End) Year 1890 1991 (1991) 1994 (1994) 1993 1993
Product Flowers and Potted Plants Potted Plants Flowers and Potted Flowers
Potted Plants Plants
Sellers Growers Growers Growers Growers Growers
Intermediary Flower Auctions Flower Auction Holland Flower Auction Aalsmeer Flower Auction East African Flowers (EAF)
(BVH) (VBA) Holland (BVH)
Buyers Wholesalers Wholesalers Wholesalers Wholesalers Wholesalers
Valuation Dutch Auction Dutch Auction Clock Dutch Auction Clock Negotiated Posted Dutch Auction Clock
Clock Offer

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KAMBIL AND VAN HECK

prior to purchase was less important to the process. into the decision making of the buyers. Video-based
Despite these expectations, buyer reaction to screen- auctioning on a computer was a limiting medium, not
based trading was negative and led to the termination rich enough to capture this information. Thus buyers
of the experiment in late 1991. Table 5 summarizes the had limited advantage in trading from their offices,
areas of key process changes, benefit expectations and when there was also a floor-based auction which pro-
actual results of the initiative. We focus only on buyers vided the traders with more information. Indeed, buy-
and the auction intermediary, as no major process ers who tried to trade from offices complained that
changes occur for sellers. they could not feel the “tension” in the marketplace.
As highlighted in Table 5, buyers cited three main Third, at the back of each auction hall is a coffee shop
reasons for not adopting the new system. First, the where buyers interact informally and share informa-
clock-based trading system provided no new efficien- tion about the market. Again, access to the social in-
cies for buyers. Second, the quality of the auction hall teraction and information was more difficult through
video display was perceived as poor, and trading from screen-based trading.
outside the auction hall created an informational dis-
advantage. In floor-based trading the buyers could ob- 4.2. The Aalsmeer Sample-Based Auction
serve each other, and the reactions of other major buy- In contrast to the BVH, the Aalsmeer auction began a
ers (from supermarket chains, etc.) to specific bids. sample-based auction for trading potted plants
This important nonprice information was incorporated (Griffioen 1994a, 1994b; Van Heck and Groen 1994). In

Table 5 Process-Stakeholder Impacts of Vidifleur

Exchange Process Auction Intermediary Buyer

1. Search No change. No change.
2. Valuation No change. No change.
3. Logistics Expected: Auction hall logistics would be eliminated No change.
allowing for cheaper and more frequent transactions
and new space for clocks.
Actual: No change during the experiment due to
potential disruptions to the current process. Real
product appeared in the hall synchronized to clock.
4. Payments and Settlements No change. No change.
5. Authentication No change in the quality grading process. In a full-scale system, buyers would find it harder to
visually inspect and authenticate quality.
6. Communication and Computing Shift to electronic communications. Electronic Expected: Electronic communications could substitute
representation of the clock as well as the product. for buyer presence in the auction halls.
Reality: Electronic communications does not capture
nonprice information, such as other bidders’
expressions and reactions to specific bids. It
reduces social interaction opportunities.
7. Product Representation Expected: Electronic flower clock and video Expected: Buyers would make decisions from their
representation of flowers would not adversely affect offices using computers rather than the auction
the sale. hall.
Result: Negative buyer reaction to video quality. Result: Negative reaction. Buyer perceive the video
quality as poor.
8. Legitimation No change. No change.
9. Influence No change. No change.
10. Dispute Resolution No change. No change.
Net Benefits None. Negative.

10 Vol. 9, No. 1, March 1998

KAMBIL AND VAN HECK

this model, growers send a sample of the product to would be priced multiple times during the auction,
the auction house along with information on available hoping it would lead to higher prices. Third, the auc-
inventory. During the auction the sample represents tion rules initially did not provide incentives to buyers
the entire inventory available to buyers who can bid by supporting transactions on large lots. Instead, the
for the product and specify product packaging and de- auction maintained rules to favor transactions in small
livery requirements. Growers then package the prod- lots. Thus, an insufficient number of buyers and sellers
uct as specified and deliver it the next day to the buyer initially adopted this new form of trading (Van Heck
location in the auction complex or to other buyer ware- and Ribbers 1996).
houses. Growers, buyers and auctions used electronic In response to this failure, the auction undertook
data interchange to share all the information required various rule changes beginning in March 1994. First,
in this process.3 This trading model reduces the num- the auction established a price floor of 70% of average
ber of times a product is handled, reducing overall price of a flower type in the most recent five days to
packaging costs and damage. reduce volatility and downside risks. Second, the rep-
The different actors—the auctions, growers, and resentative lot was auctioned first. This sample lot typ-
buyers—expected a number of different benefits. First, ically received a higher price than following lots of the
by uncoupling logistics and price determination, the same type and quality. Buyers believed the first sample
auctions and growers expected the number of trans- to always be of best quality within any quality rating.
actions per hour to increase. In reality the number of Third, the lot size was increased to three stapelwagens4
transactions per hour decreased, as buyers had to spec- from one. The growers were also forced to increase the
ify terms of delivery. Second, while the auctions ex- number of plants offered in any one transaction, so that
pected 45% of the supply of potted plants to be trans- they did not game the system. To meet the needs of
acted in the sample-based auction, only 10% of the large buyers, buyers were permitted to buy either one
product was transacted this way. Thus, sample-based or three stapelwagens per transaction. To prevent
auctions also did not effectively reduce storage re- gaming, the grower for any type of flower was only
quirements at the auction. After numerous attempts to allowed one auction per category of product for price
increase the volume of sample-based auctions, they determination. These rule changes temporarily stabi-
were discontinued in late 1994. Table 6 summarizes lized the market, but the lack of growers and buyers
results of the initiative. Only areas of change are dis- adopting the method led to its demise in late 1994.
cussed below.
The sample-based auction failed to meet expecta- 4.3. The Holland Supply Bank: Image
tions for many reasons. First, the incentives and bene- Representations and Negotiated Trading
fits to buyers and growers (in particular) did not To respond to the needs of larger buyers, the BVH and
change substantially to encourage their participation Aalsmeer auctions have diversified to create a bro-
in this market. Specifically, growers received no extra kered market for flowers and potted plants. In the “be-
compensation for modifying packaging and delivery middelingsbureau” (BB), or Mediation Office, an auc-
practices to suit the customer. Second, the growers per- tion employee acts as an agent for the growers and
ceived that they got lower prices in a slower auction. negotiates between growers and buyers in a forward
To overcome this disadvantage growers would break market. Prices, product specifications, amount of lots,
the same product into different sample lots so that it and delivery specifications are specified in a contract
which is legitimized and monitored by the mediation
3
Beginning in 1992, growers and auctions adopted electronic data
office. In 1994, about 18% of flowers and potted plants
interchange to communicate product, order, and transaction infor- were traded this way. In 1996, this amount increased
mation to each other. EDI reduces double entry of data into systems to 22%. The mediation office is useful for the sale of
and paperwork, and reduces errors. Growers who use EDI can sub-
4
mit data on shipments until 3:00 p.m. instead of 12:00 p.m. for paper Stapelwagens are a fixed-size cart used to transport flowers
transfer. through the auction complex.

Vol. 9, No. 1, March 1998 11

KAMBIL AND VAN HECK

Table 6 Process-Stakeholder Impacts of the Sample Based Auction

Exchange Process Growers Auctions Buyers

1. Search No change. No change. No change.
2. Valuation Expected no change. Expected no change. Greater uncertainty about product
Result: Classify into smaller lot sizes Auction process is slowed down due quality leads to discounting of
so same product is sampled and to the need to specify packing nonsample lots.
effectively priced multiple times. information and buyer gaming.
Price is on average 10% less on Lower commissions on remainder for
remainder than sample lot. This sample lot.
results in less revenue. 70% of previous five days’ average
price as a price floor.
3. Logistics Increased burden from needing to Lower logistics costs. More efficient delivery of the product.
customize packaging to buyer
specifications.
4. Payments and Settlements No change. No change. No change.
5. Authentication No change. Minor change ensuring product is Inability to authenticate quality ahead
properly delivered. of time. Must verify product is
properly received.
6. Communication and Computing Minor change: More use of EDI to Minor change: More use of EDI to Minor change: More use of EDI to
send coordination information. send coordination information. send coordination information.
7. Product Representation Enabled to select a sample lot that is Sample lot substitutes for actual Buyers cannot visually evaluate the
of higher quality than the transaction lot. whole offer.
remaining product. Must decide to buy based on the
sample lot.
8. Legitimation No change. No change. No change.
9. Influence More difficult due to more complex No change. No change.
transaction.
10. Dispute Resolution No change. No change. No change.
Net Benefits Negative. Negative. Negative.

large lots to large buyers, like supermarkets, for the 4.4. The Tele Flower Auction System
occasions market. Since 1993, the Dutch flower industry has been con-
The mediation office, as an honest broker, reduces cerned about the increasing flow of foreign flower
the costs of search, communications, and bargaining products into the Dutch flower auctions and down-
for buyers and sellers. It also provides a mechanism to stream logistics and distribution systems. These im-
legitimate the transaction and resolve disputes in the ports were having an adverse effect on the margins of
event the contract is not met. Image databases of prod- Dutch growers and the prices of key commodity prod-
uct types and inventory are especially useful for trans- ucts like roses and carnations. After a referendum in
actions in the mediation office. Wholesale buyers find September 1994, the growers, who are the owners of
that the pictures of the product are also very useful the Dutch auctions, decided to ban foreign grower par-
marketing tools to downstream retailers. Electronic ticipation in the auctions during the summer. These
data interchange is used for communications of orders efforts to reduce foreign access to the traditional Dutch
and the coordination of settlements, and delivery. This auctions led buyer organizations and foreign growers
results in fewer errors and greater transaction to announce the creation of competing auctions. In par-
efficiency. ticular, the East African Flower (EAF) importers asso-
Table 7 summarizes the major impacts of the Hol- ciation responded to this ban by developing the Tele
land Supply Bank on different stakeholders. Flower Auction (TFA) (Van Heck et al. 1997).

12 Vol. 9, No. 1, March 1998

KAMBIL AND VAN HECK

Table 7 Process-Stakeholder Impacts of the Holland Supply Bank


1. Search Benefit: The HSB permits growers to Benefit: Efficient image database Benefit: Large buyers’ search costs
search for buyers. combined with broker matching are reduced.
system.
2. Valuation Expected no change. Mediation process is less costly than Cost: Slightly higher prices but
Benefit: Slightly higher prices with logistics-intensive process. reduced uncertainty.
less uncertainty.
3. Logistics Benefit: Efficient product transfer in Benefits: Less logistics in the auction Benefits: Direct delivery from seller
bulk to buyer. hall. with no repacking costs.
4. Payments and Settlements As specified in the contract. Managed by mediation office. As specified in the contract.
5. Authentication No change. Costs: Quality managers evaluate Cost: Inability to authenticate quality
sample, and assign a quality ahead of time.
grade. Monitor and ensure
delivery.
6. Communication and Computing Minor change: More use of EDI to Minor change: More use of EDI to Minor change: More use of EDI to
send coordination information. send coordination information. send coordination information.
7. Product Representation Cost: Growers send data and sample Cost: Quality managers create a Cost: Buyers cannot visually evaluate
lot. Growers perceive quality digital image of sample lot to the offer and perceive quality
grades as broad and don’t reflect present to buyers in addition to grades are broad. Benefit:
true quality. the rating. However, images are useful for
downstream trade.
8. Legitimation No change. Mediation office. No change.
9. Influence No change. No change. No change.
10. Dispute Resolution No change. Mediation office. No change.
Net Benefit Positive—higher prices and less Positive—less logistics requirements. Positive—ability to transact for large
uncertainty. lots into the future.

TFA is a completely electronic auction that enables PC screen the buyer sees the Dutch auction clock. The
buyers to trade at a distance. Decoupling the logistics clock hand starts at a high price and drops until a
and price discovery processes, the buyers can bid for buyer stops the clock by pushing the space bar at the
different flowers via their personal computer (PC) keyboard of the PC. The auctioneer then asks the buyer
screens (Bos 1995, 1996; Eras 1995; Van Vliet 1994). Us- via an open telephone connection how many flowers
ing ISDN services of the Dutch PTT, each buyer’s PC of the lot he or she will buy. When the buyer provides
is connected from his or her office to a fully comput- the amount, the auctioneer legitimates the transaction.
erized Dutch auction clock. The PC provides infor- The clock is then reset, and the process begins for the
mation on the producer, product, unit of currency, next lot until the remainder of the product is sold.
quality, and minimum purchase quantity. For added The auction logistics are substantially simpler than
convenience, the PC also provides the buyer with tex- the traditional DFA. The EAF receives and stores flow-
tual information on the available flowers, specific lots ers and plants from growers in a distribution ware-
for sale, and two digital images of each lot. One image house facility in the nearby town of Amstelveen. The
gives an overview of the lot to inspect ripeness of flow- flowers from the Amstelveen facility are transported
ers, and the other presents details of the flower bud, to the wholesaler’s address directly by transporters of
to evaluate its size and diagnose potential diseases. EAF. In an agreement with the VBA, the EAF was also
The buyer can then use the PC’s custom software to permitted to deliver products to the buyer’s rented fa-
flag interesting lots, so that the computer can alert the cilities at the VBA. This way the auction minimizes
buyer when it is time to auction the specific lot. On the most internal logistics operations and is able to deliver

Vol. 9, No. 1, March 1998 13

KAMBIL AND VAN HECK

flowers to buyers in a timely way. The major process in turn will permit more varied forms of trading, customized
changes relative to the traditional Dutch auction are to different user requirements.
summarized in Table 8.
The four cases illustrate the use of information tech-
Overall, TFA was an immediate success. Since its
nology to separate the informational and physical trad-
implementation in March 1995, it has grown from auc-
ing processes. In all cases the valuation and logistic
tioning the product of 2 main East African growers to
processes are increasingly de-coupled from one an-
include products from 40 growers in Africa, Spain, Co-
other in time and space. For example, the Holland Sup-
lombia, France, India, and Israel. By the end of the
ply Bank illustrates the implementation of the media-
year, the TFA had nearly 160 buyers (about half are
tion bureau to broker trading of large futures contracts
located in the Aalsmeer area; the rest are scattered
between large buyers and different growers separating
throughout the Netherlands). The TFA was estimated
logistics and information processes. Similarily, in the
to be the fourth largest flower auction in Holland by
Tele Flower auction, the buyers are able to bid for
the end of 1996.
products from remote locations. The buyers can cus-
Why were buyers willing to accept this new auction?
tomize the system by specifying preferences and re-
First, it uniquely satisfied the buyers’ needs to inex-
ceiving alerts when the product they want is being
pensively purchase foreign flowers and include them
auctioned.
in their existing distribution chains. Second, buyers we
These observations also lend support to Malone et
interviewed said the flowers they purchased from the
al. (1987), who note that information technology en-
TFA often exceeded their quality expectations as de-
ables personalized markets where software agents
termined by the quality grades. Thus, the TFA created
would support trading customized to individuals and
a reputation for setting high quality standards, en-
firm preferences. While the new flower auctions are
hancing trust in the auction and minimizing adverse
not as fully advanced, they achieve a better fit between
selection. If necessary buyers close to the warehouse
the transaction preferences of larger buyers and the
location could physically inspect the product. Buyers
organization of exchange processes by overcoming the
were also impressed with the computer data, the qual-
capacity limits and colocation requirements for floor-
ity of the products, and the speed of delivery after their
based trading. These new trading mechanisms better
purchases were completed. The buyers also felt they
suit the unique requirements of large versus small
had a better overview of the auction, as compared with
buyers.
the traditional Dutch auction.
The observations across cases illustrate that infor-
mation technology substantially reduces coordination
5. Lessons Learned from IT- costs and enhance communications capabilities. These
changes allow transacting parties to separate in space
Innovations in the Dutch Flower (e.g., TFA bidding process) and time (e.g., HSB deliv-
Auctions ery logistics) the informational and physical compo-
Based on our research we did a cross-case analysis to nents of trading processes. Indeed, the informational
identify factors that influence the successful or unsuc- and physical components within each of the ten ex-
cessful use of information technology in markets. We change processes defined in this paper could be de-
use this analysis to develop a series of observations on coupled from one another and provided by different
the market impacts of IT as well as the success and actors without the necessity for colocation. Over time
failure of IT-based initiatives in markets. These obser- this will permit the creation of more distributed and
vations stated as propositions, and the supporting customized market institutions for the trade of physi-
analysis and discussion are given below. cal goods.
Proposition 1. The application of information tech- Proposition 2. Information technology-enabled pro-
nologies to trading can enable increased efficiency and sep- cess innovations change the information available to differ-
aration of informational and physical trading processes. This ent stakeholders. When different stakeholders perceive these

14 Vol. 9, No. 1, March 1998

KAMBIL AND VAN HECK

Table 8 Process-Stakeholder Impacts of the Tele Flower


1. Search No change from DFA. Benefit: Efficient databases and Benefit: Up-to-date online database
online system for presenting trade reduces search costs for specific
opportunities. products. Alerts inform buyers of
opportunities.
2. Valuation No change. Very efficient screen-based auction Benefit: Screen trading enables better
clock process. oversight and concentration on
bidding.
3. Logistics Benefit: Efficient product transfer to Benefits: No auction hall logistics are Benefits: Faster delivery from auction
Amstelveen warehouses. necessary. Less errors due to due to decoupling of logistics and
simplicity of a decoupled system. price discovery.
Cost: Transport to buyer locations.
4. Payments and Settlements 24-hour payment and settlement Managed by EAF. 24-hour payment and settlement
clearing. clearing.
5. Authentication No change. Costs: quality managers evaluate Benefit: Auction quality control
sample, and assign a strict quality reduces risks—may exceed buyer
grade. Monitor and ensure expectations. Cost: Inability to
delivery. authenticate quality ahead of time.
6. Communication and Computing Simplified phone and data Simplified phone and data Text representations and digital
communications. communications. images enable simplified
communications.
7. Product Representation Cost: Growers perceive quality Cost: Text representation of product Cost: Buyers cannot directly evaluate
grades as broad and don’t reflect in addition to the quality rating. the offered product. Benefits:
true quality. Screen-based representations
enable remote trading.
8. Legitimation Benefit: Growers don’t have to be an EAF is primary authority. No change.
EAF member, enabling foreign
imports.
9. Influence Growers have little influence on EAF organization defines the market Buyers do not have direct influence
auction policies. rules. on auction rules.
10. Dispute Resolution No change. No change: Arbitration by the auction No change.
reduces costs.
Net Benefit Positive: for excluded foreign Positive: lower cost auction model. Positive: product access and remote
growers. buying.

changes reduce the relevant information or trust, they will technology applications enable the provision of more
act to either increase the information available or discount relevant information to decision makers (Bakos 1991b,
prices to account for increased risks. Brynjolfsson et al. 1994, Gurbaxani and Whang 1991,
Market organizations, like other governance sys- Malone et al. 1987). However, the cases above illustrate
tems, are information processing systems that repre- that IT can actually reduce the relevant information
sent a consensus among different competing stake- available to decision makers. The application of infor-
holders on organizing the interdependent processes mation technology to communication and product rep-
identified in § 2. These processes serve to generate or resentation processes had major impacts on relevant
organize information, or to reduce uncertainties and information available for price discovery, authentica-
mitigate opportunism risks faced by different stake- tion, and logistics processes. When information or trust
holders (Kambil 1992). The prior literature on markets as perceived by specific stakeholders was reduced in
and technology generally presumes that information these processes, they or other interested stakeholders

Vol. 9, No. 1, March 1998 15

KAMBIL AND VAN HECK

acted to increase the information and trust, or reduced or trust-generation costs. Market designers can re-
prices to discount for new risks. spond to these requirements by allowing more infor-
For example, in the SBA, the buyers chose to dis- mation gathering by different stakeholders (buyers
count the prices bid for non-sample lots by nearly 10% and sellers) or create trust and reputations for fairness.
because they could no longer authenticate quality by Both these choices lead to differential levels and allo-
visual inspection. Similarily, growers in the SBA de- cations of costs across stakeholders. These costs and
creased lot sizes or reclassified their product so that their distribution across stakeholders must be consid-
the same product was displayed multiple times. The ered by designers of new IT-enabled market mecha-
nisms if the new market is to be adopted.
growers’ objective was to have multiple new bidding
cycles for price determination, hoping that multiple Proposition 3. Market organizations are the meeting
bidding competitions for smaller lots among buyers point for multiple stakeholders: buyers, sellers, and inter-
would generate new demand information leading to mediaries with conflicting incentives. Given existing or
competing market alternatives, no new IT-based initiative is
higher prices. Both of these responses reduced the at-
likely to succeed if any key stakeholder is worse off after the
tractiveness and efficiency of the sample-based auc-
IT- enabled innovation.
tion, leading to its ultimate demise.
While the Holland Supply Bank and the Tele Flower The process-stakeholder analysis framework devel-
auction reduced the ability of real-time authentication oped in § 2 of this paper was applied to map process
changes and their impacts on different stakeholders. In
of the product, they provided new benefits to the dif-
the two cases of failure, the application of the frame-
ferent stakeholders or created trust in new ways. In the
work clearly identified either the grower or the buyer
former, parties were able to trade in a way that re-
was worse off from the innovation. For example, in the
duced uncertainty and generated information about SBA the grower incurred new packaging costs and lo-
future availability of demand, prices and goods. In the gistics costs. In the Vidifleur auction, the buyers did
latter, to create trust among buyers in the new auction not perceive a new benefit from the system. The video
process and establish a reputation for quality, the Tele quality was poor, authentication of quality less con-
Flower auction ensured that the product matched or venient, and trading online did not provide all the in-
exceeded buyers’ expectations given a specific quality formation available in the auction hall.
rating. While we cannot establish that the product was In contrast, the Holland Supply Bank and the Tele
traded at a lower price than when it was visually in- Flower auctions created new advantages for all stake-
spected, the tight quality control that assures a product holders who participated. In the Holland Supply Bank,
matches or exceeds its quality ratings leaves it open to buyers were able to order large quantities of product
being discounted to the price level of the quality rating and specify a contract for delivery on a future date,
rather than the price of the flower given perfect quality reducing the growers’ uncertainty about future price
information. levels. The Tele Flower auctions provided Dutch buy-
The above observations are consistent with prior re- ers with a source of foreign flowers, foreign growers
with a trading location that could take advantage of
search on the governance of exchange relations. First,
the Dutch wholesaler’s demand for flowers, and
the need for information seeking to reduce uncertainty
downstream logistics facilities.
is well known. The generation of trust (the expectation
These cases illustrate the need to carefully design
of future nonopportunistic behavior) and preservation
and implement electronic markets and to include ad-
of good reputations is also important to reduce trans- equate incentives to different stakeholders for partici-
action costs or “friction” in exchange (Arrow 1974, pation. All stakeholders must be better off with the
Fukuyama 1995). Third, social exchange theorists have new system rather than the old system, otherwise the
identified the importance of equity and fairness (Blau new market will fail and revert back to the prior sys-
1964, Homans 1961). The cases illustrate that reduc- tem if this alternative remains available. The process-
tions in information available due to an IT-enabled stakeholder analysis framework can be used by market
process discontinuity creates new information seeking designers to evaluate the consequences of their designs

16 Vol. 9, No. 1, March 1998

Re-engineering the Dutch Flower Auctions

Re-engineering the Dutch Flower Auctions

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