CS5038 The Electronic Society

1. CS5038 The Electronic Society • Lecture 6: Auctions and Other Services • Lecture Outline • Overview • eBay example • Types of Dynamic Pricing • Auction Types • Mechanisms • Auctions – benefits, problems, uses • Auction Process and Software Support • Auction Fraud

2. Online Auctions • Used in B2C, B2B, C2C, G2B, G2C ….. • Volume traded on eAuctions significantly larger than traditional auctions, and growing • Internet auction industry projected to achieve $54.3 billion sales by 2007 • Innovative examples: • Warren Buffet (famous US stock investor) invites eight people to lunch, they pay $30,000 for the pleasure (money goes to charity) • In 2003 he put invitations on eBay – pushed price up to $250,100 • In 2004 it was $202,000 • Bidders were happy to get opportunity they would not otherwise have had • Google IPO – September 2004 – Dutch Auction on Internet • Generated more money • Fair distribution of shares (allegedly!) • eBay trading assistants – approx. 40,000 • Charge 25% comission • Some earn $100,000-$150,000 per year in comission

3. eBay • Pam Omidyar was a collector of Pez candy dispensers • She suggested trading them on the Internet to her boyfriend • They set up AuctionWeb in 1995 • Company was renamed eBay • Now over 500,000 new items added daily, 120 buyers • Many local US sites (60) and country specific sites (30) • Also owns/part owns many country specific sites: China, India, Korea, Japan – generates 46% of eBay’s business • Introduced seller protection in 2002 • Bad cheques • Credit card fraud • Initially C2C, but in 2002 introduced Business Marketplace • http://pages.ebay.com/businessmarketplace/

4. Types of Dynamic Pricing Prentice Hall, 2002 • Bartering Online • Example: office space, storage, factory space, idle facilities and labor • Difficult to find partners  bartering exchanges –whosbartering.com • Offer items to intermediary and earn points to buy other items • Negotiating and bargaining online – technology helps: • Intelligent agents perform search and comparison to use in bargaining • Products and services may be bundled and customised

5. Auction Types • Types http://www.agorics.com/Library/auctions.html • Forward – One seller, many buyers • Reverse – One buyer, many sellers (aka tendering system) • Double – Many buyers, many sellers (lower prices usually) • Both bids and asks are allowed • Mechanisms • English auction • Start at minimum price, set a minimum increment, bidders keep increasing their bid until only one is left or timeout • Known as Yankee auction when multiple items are being auctioned • Dutch auction – multiple items (Free fall auction if only one item) • Start at high price, price reduced at fixed time intervals until a bidder buys • Much faster than English auction • Sealed bid first price • Known as discriminatory auction when multiple items are being auctioned • Sealed bid second price (aka Vickrey) • Known as uniform-price auction when multiple items are being auctioned • Lack of commonality in naming conventions • What some people call a uniform second-price auction is known in financial communities as a Dutch auction

6. Auctions • Benefits • Quick – especially to liquidate obsolete stock • Optimal price for seller • If seller is unsure of value • Discover buyer’s valuation • Problems • Fraud – see slide 7 • Reveals buyer’s valuation • Winner’s curse • Uses • Coordination mechanism to establish equilibrium price • e.g. telecomms bandwidth – automatic auctions • Social mechanism to determine price – for rare goods • Highly visible distribution mechanism – bargain hunters • Component of EC system – e.g. group purchasing

7. Auction Process and Software Support • Phase 1: Searching and comparing prices • Mega-searching and comparisons • Search utilities return all auctions selling an item • Automated search services • Notify buyers when items they are interested in are available • Phase 2: Getting started at an auction • Registration and profiling (previous transaction records) • Listing and promoting – tools available for bulk listings • Pricing – set start price, bid increment and reserve price • Phase 3: The actual bidding • Bid watching and multiple biddings • Auto-sniping - enter a higher bid during last seconds • E-proxy bidding—software system bids on behalf of the buyers • Phase 4: Post-auction follow-up • Post auction notifications for winners • User communication - Chat groups, Mailing lists, Message boards • Shipping and postage • Payment - Electronic transfer, Escrow service, Credit-card payment

8. Auction Fraud • Types of e-auction fraud • Bid shielding • Phantom bidders bid at a very high price when auction begins • Other real bidders are scared off • Phantoms pull out and low bidder can win • Shilling - sellers arrange to have fake bids placed on their items to artificially jack up prices • Auctioneer inserts fake bid in Vickrey auction • Rings – bidders collude, bid low, win and split profit later • Susceptibility to collusion: • (1) English (2) Vickrey (3) sealed first-price (4) Dutch • Dodgy Merchandise: • Fake photos, misleading descriptions, improper grading techniques, Selling reproductions as originals • Failure to ship merchandise after money is paid • Bogus loss and damage claims—buyers claim they never received an item or received it in damaged condition, request a refund

9. Protecting Against E-Auction Fraud • User identity verification • voluntary program on eBay - $5 • Product Authentication services, Appraisal services • Employ expert authenticators • Grading services • Determines physical condition of an item • Feedback forum • Users build up online trading reputation • Insurance policy • eBay offers insurance underwritten by Lloyd’s of London • Escrow services - escrow.com • Third party holds funds until buyer receives and inspects • Non-payment punishment • eBay - Suspends winners who don’t pay

10. Summary • Types of Dynamic Pricing – one to many, many to one • Auction Types – forward, reverse, double • Mechanisms – English, Dutch, Sealed bid, Vickrey • Auctions – benefits, problems, uses • Auction Process and Software Support • Auction Fraud • Dodgy bidding, dodgy auctioneers, dodgy goods • QUIZ 9 • 1. technical ability of buyers • 11. What are the steps in bargaining online? • Search, selection, negotiation, continuing selection and negotiation, and transaction completion. • 12. security

12. Strategy and the Long Tail • "We sold more books today that didn't sell at all yesterday than we sold today of all the books that did sell yesterday." - Amazon • Examples: • Ecast - digital jukebox >150,000 tracks - what % of top 10,000? • eBay (auctions), • Yahoo! and Google (web search), • Amazon (retail) • Netflix (video rental). • Key factor = cost of inventory storage and distribution • Costs insignificant -> viable to sell relatively unpopular products e.g. online store • Costs high -> only most popular products can be sold e.g. traditional movie rental store • Implications for society and culture: • More tastes can be catered for because of cost reduction(in contrast to broadcast TV for example) • Long tail alone is not enough (mp3.com) – nor are “hits only”