On Auctions as the Negotiation Paradigm of Electronic Markets

Until recently, electronic markets were dominated by the combination of static offer schemes and fixed pricing. Static offer schemes such as online catalogues apparently bear the risk of not matching the requirements of all potential buyers. But fixing a price also imposes another risk to the seller the price might not always reflect the current market balance of supply and demand and the specific valuation of a single buyer. Whereas static offer schemes today are still prevalent, electronic auctions address the risk related to fixed pricing with an easy way of price discovery and differentiation by soliciting a wide range of bids from multiple parties. In this paper reasons for the recent success of the auction paradigm in electronic markets are identified. But we will also illustrate one fundamental limitation: the price-based bidding of today’s auctions supports only distributive negotiations and does not provide a model for integrative negotiations where differences in the valuations of consumers and providers are exploited in order to achieve joint gains. Several solutions have been suggested to address this issue. We review critically these approaches and outline directions for future research.