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86 Part 1 Introduction

Focus on Auction business models

With the success of eBay (www.ebay.com), auctions have been highlighted as one of the new
business models for the Internet. But how do auctions work, what infrastructure is required
and what is the potential for B2B auctions? In this section we will address some of these issues.
Auctions involve determination of the basis for product or service exchange between a
buyer and seller according to particular trading rules that help select the best match between
the buyer and seller from a number of participants.
Klein (1997) identifies different roles for auction:
1 Price discovery – an example of price discovery is in the traditional consumer auction
involving bidding for antiques. Antiques do not have standardized prices, but the auction
can help establish a realistic market price through a gathering of buyers.
2 Efficient allocation mechanism – the sale of items that are difficult to distribute through
traditional channels falls into this category. Examples include‘damaged inventory’ that has
a limited shelf life or is only available at a particular time such as aircraft flight or theatre
tickets. Lastminute.com (www.lastminute.com) has specialized in disposal of this type of
inventory in Europe, not always by means of auctions.
3 Distribution mechanism – as a means of attracting particular audiences.
4 Coordination mechanism – here the auction is used to coordinate the sale of a product to
a number of interested parties; an example is the broadband spectrum licences for 3G tele-
coms in the UK (www.spectrumauctions.gov.uk).
Offer To understand auctions it is important to distinguish between offers and bids. An offer is a
A commitment by a commitment for a trader to sell under certain conditions such as a minimum price. A bid is
trader to sell under
certain conditions. made by a trader to buy under certain conditions such as a commitment to purchase at a
particular price.
Bid There are many potential combinations of the sequence of bids and offers and these
A commitment by a have been described by Reck (1997). Despite the combinations two main types of auction
trader to purchase under
certain conditions. can be identified:
1 Forward, upward or English auction (initiated by seller). These are the types of auctions
available on consumer sites such as eBay. For these auctions, the seller sets the rules and
the timing, and then invites potential bidders. Increasing bids are placed within a certain
time limit and the highest bid will succeed provided the reserve (minimum) price is
exceeded. The forward auction can also potentially be used to perform price discovery in
a market.
2 Reverse, downward or Dutch auction (initiated by buyer). These are more common on busi-
ness-to-business marketplaces. For these auctions, the buyer sets the rules and the timing.
Here, the buyer places a request for tender or quotation (RFQ) and many suppliers
compete, decreasing the price, with the supplier whom the buyer selects getting the
contract. This will not necessarily be the lowest price since other factors such as quality and
capability to deliver will be taken into account. Companies may use reverse auctions to:
rationalize suppliers in a particular spending category;
source new components in an area they are unfamiliar with.
Some marketplaces also offer a basic exchange where buyers and sellers can offer and bid,
but without the constraints of an auction. The scale of some auctions is shown by the auc-
tion activity of large manufacturers such as DaimlerChrysler. Through 2001 there were over
512 online auction bidding events processed for DaimlerChrysler on vendor-supported
portal Covisint (www.covisint.com) amounting to approximately €10 billion, that is, a third
of their total procurement volume. In May 2001, DaimlerChrysler staged the largest online
bidding event ever, with an order volume of €3.5 billion in just four days. As well as savings
in material purchasing prices, DaimlerChrysler also reduced throughput times in purchas-
ing by 80 per cent (Covisint, 2002).