Ajit Kambil, NYU

Appendix 1: Different Auction Models

A number of different methods exist to auction and value goods exchanged between buyers and sellers. Below we provide a number of different auction techniques for the purpose of discussion. These auction models were adapted from Davis and Holt, Experimental Economics, Princeton University Press (1993).

The Dutch Auction

In a Dutch auction, the auctioneer lowers the offer price sequentially until a buyer agrees to pay the offer price. Often the prices are indicated by a clock, which falls over a price scale until a buyer presses a button to stop the clock. The first buyer to do this obtains a unit at the price in effect at the time that the clock was stopped. The Dutch auction derives its name from its extensive use in wholesale agricultural markets in Holland. The following Java applet illustrates the Dutch Auction.

The English Auction

In the English auction, different potential buyers bid for a good or service, sequentially increasing the offered price until only one active bidder remains. This auction technique is commonly used for the sale of artwork and other valuable objects.

Offer Auction

An offer auction is an institution in which sellers can make offers sequentially, and buyers are able to accept any offer, but not to make any bids.

Bid Auction

A bid auction refers to the opposite case in which buyers can make bids sequentially, but sellers can only indicate that a bid is accepted.


Other Auction Models:

Clearinghouse Auction

In the clearinghouse auction, buyers submit bids and sellers submit offers. Once submitted, the bids are arrayed in descending order, from highest to lowest, while the offers are arrayed in ascending order, from lowest to highest. A price is then determined by a crossing of the bid and offer arrays. This two-sided institution eliminates the performance asymmetries associated with allowing only one side of the market to submit price quotes. It is perceived as a fair auction.

Posted-Offer Auction

In the posted-offer auction, sellers independently select a price and a maximum quantity limit. After prices and quantity limits have been selected, the prices are displayed on the blackboard or on all traders' computer screens. Then buyers are chosen randomly from a waiting mode. The first buyer selected makes purchases from sellers at their posted prices. When a buyer has purchased all desired units, another is selected randomly and is given the same opportunity. The trading period ends when all buyers have had an opportunity to shop or when all sellers are out of stock. Then earnings are calculated, and a new period typically follows.

Posted Bid Auction

Reversing the roles of sellers and buyers in a posted offer (i.e., allowing buyers to post bids and subsequently selecting sellers in random order to make sales decisions) implements the posted-bid auction.


Discriminative Auction

In a discriminative auction buyers submit posted bids to a single seller, who offers a fixed number of units, N, to the highest bidders at their price. For example, if two units are offered for sale and four bidders submit bids of 15, 17, 10, and 9, then the first two bidders obtain the units at prices of 15 and 17 respectively. This auction is called discriminative since winners must pay their own bid prices, and in this sense the seller engages in "price discrimination".

First-Price, Sealed-Bid Auction

When there is only one unit or "prize", the high bidder in the discriminative auction wins the auction and purchases it at his/her bid price, which is the highest, or "first" price. Therefore, a discriminative auction with a single unit is sometimes called a first-price, sealed-bid auction.

Competitive Sealed-Bid Auction

In contrast to the discriminative case, it is possible to design a mechanism for selling multiple units in which all of the N highest (winning) bidders pay a uniform price. When the uniform price is specified to be the highest rejected bid, the institution is known as a competitive auction. In the previous example, with two units and bids of 15, 17, 10, and 9, the first two bidders obtain the units, but they pay the same (third) price, 10. Since all winning bidders pay the same market-clearing price, this institution can create an impression of fairness.

Second-Price, Sealed-Bid Auction

A second-price auction is a special case of a competitive sealed-bid auction with only one prize; the highest rejected bid is the second highest price, which is what the winning bidder must pay.

Decentralized Negotiation

In a decentralized negotiation institution, each seller (buyer) is allowed to roam freely around the room and negotiate contracts. Each seller (buyer) had one unit that could be sold (purchased) with a cost (reservation value) listed on a card. After a contract is completed, the buyer and seller report the price to a central point, and the price is usually written on the blackboard at the time it is reported. The most striking result of the decentralized negotiation is the tendency for quantity exchanged to be too high. While centralized bid and offer information would tend to eliminate trades involving extra-marginal units, the absence of information on the bid-ask spread in decentralized markets would facilitate the consummation of more inefficient contracts.

Double Auction

Under double auction rules, any buyer who makes a bid must raise his/her hand and be recognized. The bid is then publicly announced to the market. Sellers' offers are also publicly announced. All bids and offers are written on the blackboard as they are made. Only the most attractive bid or offer has "standing" or can be accepted. Any buyer is free at any time to accept a standing offer, and any seller can accept a standing bid. It is common practice to add an "improvement rule"; that is, that a new bid be greater than the standing bid and that a new offer be lower than the standing offer. This is a double auction in a sense that bids rise and offers fall at the same time.

Auction Formats

The English Auction is one of the most common auction formats. It is also know as the open-outcry auction or the ascending-price auction. It is frequently used for selling art, wine, and other physical goods, which do not have a limited lifetime.

The Auction Format is defined in the following way: The auctioneer starts off the auction with the lowest acceptable price or the reserve price. He then receives bids from the bidders until no one will increase his bid. At that point, the auctioneer 'knocks down' the item, which indicates that the bidder with the highest bid will receive the item in exchange for the sum of money that his bid reflected.

Dutch Auction

The Dutch Auction was developed in the Netherlands to auction flowers and other products with a limited lifetime. It is also know as the descending-price auction. Note that in the financial world the auction known as "Dutch" in this paper is referred to as a Vickrey auction.

The First-Price Sealed-Bid Auction has the main characteristic of not being an open-cry auction, like the English or Dutch Auction, and thus the individual bids are hidden from other bidders. In the financial community this auction format is referred to as an English Auction, except in Great Britain where it is know as the American Auction. This paper will however use the academic term of First-Price Sealed-Bid Auction.

Two different phases exist within a First-Price Sealed-Bid Auction. A bidding phase, in which all the bids are collected, and a resolution phase, in which the bids are opened and the winner is determined. During the bidding phase, each bidder submits his bid, which is based on his own valuation. The bidder is thus totally ignorant of all the other bids that have been submitted. The resolution phase works like this: All the bids are opened and sorted from the highest to the lowest bid. If it is only one item that is auctioned, the highest bid will be the winning bid. If multiple items of the same product are auctioned, the items are awarded to the highest bids until no more items are left. This is called a Discriminatory Sealed-Bid Auction, since not all the bidders pay the same price.

In a Vickrey Auction the bids are sealed and each bidder bids from his own expectation, ignorant of all the other bids. What is different in this auction format compared to the First-Price Sealed-Bid Auction is that the winning bidder will pay the price of the second highest bid, which is the same as the highest unsuccessful bid. Thus, the winner pays less than what he has bidden. When the Vickrey Auction is applied to include multiple units of the same item, all the winning bidders will pay the same price. This price will be the highest unsuccessful bid.

The Vickrey Auction has been used for credit refinancing in former Czechoslovakia and for foreign exchange auctions in Guinea, Nigeria, and Uganda. The U.S. Treasury Department is looking at this auction format for issuing national debt.

Figure 2 - Expected Revenue - Independent vs. Private Values

Economic rationality behind auctions

Auctions as a distribution allocation mechanism identifies auctions for consumer products which are difficult to sell through the ordinary market channels because they are:

• Products with limited life, such as airplane seats (which are worthless after the plane has taken off); and/or

Impact of the web on electronic auctions

The electronic auction process is illustrated in the figure below. The auctioneer brings together suppliers (sellers) with customers (buyers or bidders) within the auction process. Furthermore, trade objects and a rule base are needed during the transaction phase. The entire auction process can be executed with information technology on the World Wide Web.

• Standardized hypertext protocol for displaying the trade objects (i.e. items to be auctioned), which will increase the economic feasibility of the electronic auctions;

• Development of standardized search functions, which will facilitate for suppliers and customers to find each other; and

• scarcity;

• goods that may be moved electronically; and

• Domain names;

• IP addresses;

Electronic Auction Seller-Buyer Perspective

From a seller-buyer perspective there are three different pairs of buyers and sellers that appear in electronic auctions. These different pairs are:

Business - Consumer can be identified with companies trying to sell off excess stock or establishing prices for new products. Thus, the B2C auction will have at least one of the perishability and scarcity market factors.

Business - Business auctions is mainly used by companies and governments to sell public contracts and surplus property. B2B auctions are in some extent privately held since only business companies can qualify as potential buyers. Therefore, B2B auction sites tend to be not as promoted to the general public as C2C and B2C auction sites are.

• English Auction; and

• Vickrey Auction (in eBay's terminology Dutch Auction).

Overview
Priceline.com is a B2C buyer-driven auction site where the buyers specify the products that they want to buy and the price that they are willing to pay. Goods to be sold include products and services such as airline tickets, hotel rooms, and cars. Airline tickets and hotel rooms are perishable goods with a limited lifetime. Other items, such as cars have a more indefinite life. Lifetime in this context is the economic lifetime, which state the time period before the product's economic value reaches zero.

The company states that this is just the beginning of the buyer-driven auction philosophy and they believe that in the future, potential buyers will be able to buy everything from vacation packages to financial services, using this auction format.

Onsale

Overview
Onsale is a B2C auction site. The company interacts with manufacturers and resellers, which sell excess supply to them. Onsale then auctions the products at the Onsale Auction web site. Thus, the Onsale auction mainly works as a distribution allocation mechanism.

• If bids are for the same price, larger quantity bids take precedence over smaller quantity bids; and

• If bids are for the same price and quantity, then earlier initial bids take precedence over later initial bids.

In this industry, where an innovation is ready to be buried after two years, it is very hard to say what the future will look like. To be competitive, the Internet auction companies will most likely try to expand into new markets. This can basically be done in two ways:

1. Expand into new product and service segments.

• Enough with orders - buy (bid) and sell.

• Feasible technical solutions.

Going once, going twice… Going strong!
By India.CNET.com Staff
December 26, 2000

Every time his boss walks past, Rajesh Mulchandani clicks the ‘Show Desktop’ button on his Windows 98 toolbar to hide the browser window. And sometimes it hurts to do that, because Rajesh may be in the closing stages of an online auction for that mobile phone he is looking for. Of course, he is not supposed to be bidding for merchandise online during working hours, but on most days, the addiction gets the better of resolve.

The craze also saw sector-specific auction sites Bollywood Auctions, Trade2Gain, MachineToolsMart and others. Most of them are doing little or no business at all.

Which has left the field clear for the two space dominators--Bid or Buy and Baazee. Each of them has over 15 categories and some 8500 products listed. Both aggressively run promos and giveaways, and do everything to retain a registered member.

Will online escrow services protect you from auction scammers?

by Andrew Brandt

(IDG) -- If you feel uneasy about sending a large check to a total stranger for something you bought at an online auction, you're smart and not alone. Of the thousands of online fraud complaints fielded by the National Consumers League last year, 87 percent concerned Internet auctions.

Authorities take notice

"If you are dealing with someone who isn't regulated, how can you trust them?" says Louisa Broudy, an assistant commissioner at California's Department of Corporations.

But not all online escrow sites agree. "Their laws aren't a good fit for escrow companies outside of California, and I think they're overly strict," says Ken Thompson, president of SecureTrades.com, an escrow business based in Michigan. "They're trying to apply a law written for real estate escrow companies in California to any Internet escrow company based outside California."

Current efforts: Tried but not true

The escrow option

Like traditional escrow services, an online escrow service helps manage the completion of a purchase between two parties who don't know one another. Where the offline services typically manage a relatively low volume of very expensive property (like homes), the online services help large numbers of buyers and sellers who use online auctions or classified ads to buy relatively low-cost items. And most online escrow companies operate at Internet speeds, using a lot of automated processes to close the purchase or sale in a matter of hours, or a few days at the most.

Some services offer a money-back guarantee if the buyer doesn't come through with the money or the seller never ships the product. The services require both the buyer and seller to register for the service with a credit card, and the buyer usually pays for the product up front. The seller then either sends the product directly to the buyer, using a shipper like Federal Express that tracks shipments, or to the service itself. If the buyer find the product to be as advertised, the escrow service pays the seller by check or direct deposit (less the service's transaction fees).

Looking over escrow's shoulder

If any of the parties in an escrow transaction--the buyer, seller, or escrow service--is based in California, the service needs a license. The benefit to consumers is clear: If a licensed business commits fraud, the California agency that oversees escrow companies can seize control of the business before more money is stolen. But they can do little about an unlicensed operation. Victims "have no recourse," says Julie Stewart, spokesperson for the Department of Corporations. "Once [a fraudulent business has] absconded with the money, the chances of you getting it back are negligible."

Earlier this year, Assistant Commissioner Broudy sent letters to more than 20 Internet escrow services asking them to either apply for a license (which would subject their operations to scrutiny) or stop offering their services to California shoppers.

Services not for everyone

Of course, before you use any online escrow business, call or e-mail the service and ask whether it's licensed to operate as an escrow service in any state.

The company should offer its license number or other corroborative information that you can check with the licensing agency. And if you're not certain that an Internet escrow service is up to snuff, you can call the California Department of Corporations (800/347-6995 from within California or 213/576-6201 from outside the state) or the National Fraud Information Center at 800/876-7060.

The fees were also meant to improve the auctions by discouraging people from listing items that no one would be interested in bidding on, said Fitzgerald. The number of bids per item listed has risen fourfold, and the likelihood that an item will be sold on Yahoo Auctions has risen more than fivefold, he said.

Online auction -- Indiainfo.com to tie up with Bazee.com
By The Financial Express
Special to India.CNET.com
Thursday, October 5 2000

According to Mr Basu, the alliance involves a multi-layered strategic relationship. "In this arrangement, Indiacar.com will become a channel partner for our portal for automobiles. The tie-up is again a fee-based deal with no equity participation," says Mr Basu.

According to Mr Basu, this form of marketing strategy is used worldwide by vertical and horizontal portals which benefit both companies. "The horizontal portal is able to provide information and services to users and the vertical one gains in terms of being able to reach a wider target audience.''