More on Electronic Auctions Fundamentals of Dynamic Pricing and Auctions

As described in Chapter 2, an auction is a market mechanism by which buyers make bids and sellers place offers. Auctions are characterized by the competitive and dynamic nature by which the final price is reached. Auctions, an established method of commerce for generations, deal with products and services for which conventional marketing channels are ineffective or inefficient. The Internet provides an infrastructure for executing auctions at lower cost with many more sellers and buyers. Individual consumers and corporations alike can participate in this rapidly growing and very convenient form of electronic commerce. Electronic auctions (e-auctions), auctions conducted online, have been in existence for several years on local area networks (see Section 12.4) and were started on the Internet in 1995. Host sites on the Internet serve as brokers, offering services that enable sellers to post their goods for sale and allow buyers to bid on those items. Although the majority of consumer goods are not suitable for auctions and are best sold through conventional sales techniques (i.e., posted-price retailing), the flexibility offered by online auction trading may offer innovative market processes. For example, instead of searching for products and vendors by visiting sellers’ Web sites, a buyer may solicit offers from all potential sellers. Such a buying mechanism is so innovative that it has the potential to be used for almost all types of consumer goods, as will be shown later with the “name-your-own-price” concept. The major characteristic of an auction is that it is based on dynamic pricing. Dynamic pricing refers to a transaction where the price is not fixed. In contrast, catalog prices are fixed, as are prices in department stores, supermarkets, and many other storefronts. There are several types of auctions, each with its own motives and procedures. It is customary to classify dynamic pricing into four major categories depending on how many buyers and sellers are involved, as shown in Exhibit 2A.1 (reproduced from Exhibit 2.8 in the textbook) and described here. Each of these auction types can be done online or off-line.