Managing Online Auctions Why Auctions Unit 8 2

Managing Online Auctions Why Auctions? Unit 8 -2 Managing the Digital Enterprise Pinker, Seidmann, and Vakrat

Business Transactions • Distinct categories of goods are involved in each of three mechanisms – A posted price – A negotiation process – An auction • Many goods that have been previously sold only at a posted price are now being sold using online auctions • The Internet has expanded the space of goods for which auctions are appropriate

Mechanism Choices • The larger the scale of the transaction in terms of cost and complexity, the more likely the transaction will be conducted via a negotiation process between the buyer and the seller, or via an auction. • The two most important determinants of which mechanism is most appropriate are the sensitivity to transaction costs and uncertainty about the correct price for the good or service.

Mechanism Choices (Cont. ) • Price discrimination is a reason for using auctions – One way to determine whether a good should be sold using an auction is to ask whethere is much to be gained through price discrimination for that good • The goods sold through either bargaining or auction institutions have similar properties – They are unique, expensive, and with uncertain equilibrium prices – The only clear common denominator for the kinds of objects that are sold at auction is the need to establish individual prices for each item sold

Mechanism Choices (Cont. ) • The cost of conducting an auction is borne by the seller, and the holding costs, per unit time, faced by a seller are smaller for the auctioneer than for the posted-price seller (Wang, 1993) • The degree of price dispersion and the relative values of buyer opportunity costs and the item being sold determine whether the seller prefers an auction (De Vany, 1987) • When demand exceeds capacity, auctions may be optimal. When capacity exceeds demand, a single price scheme is optimal (Harris and Raviv, 1981) • Rare items are often auctioned because with rare items, the demand exceeds the seller’s capacity.

The Effect of Online Auctions on the Product Space Partition Between Posted-Price and Auction Sales