8. AUCTIONS AND DYNAMIC PRICING
No where perhaps is the impact of the web more evident than in the case of auctions. By now everyone has heard of eBay, the pioneer in person-to-person online trading. Founded in 1995 by Pierre Omidyar, the company now provides millions of auctions, and hundreds of thousands of new items every day from which bidders may choose.
In the future, auctions will have a profound effect on many aspects of business on the web, from product pricing to supplier contracting to inventory liquidation. Auctions use the market mechanism to solve a difficult business problem: pricing. Setting prices can be tricky, as product managers well know, especially when it comes to new product releases. Price the product too high and inventories mount; under price what the market is willing to pay and shortages occur and money is left on the table. Finding the right balance can take time, and indeed, one can continue to miss the mark as the market shifts and competition evolves. With an auction, there is no guess work: the market sets the price (above some minimum). Auction-based pricing is sometimes referred to as "dynamic" or "fluid" pricing, in contrast to set or static pricing mechanisms.
To appreciate the full potential of the auction, one must recognize the many possible permutations this model can assume -- especially on the web. The commonly used auctions are the open-cry (or English) auction, the sealed bid auction, and the Dutch auction. However, there are a number of dimensions that can be varied in an auction to yield subtle but important differences in the process and outcome.
Things to read:
What Consumers -- and Retailers -- Should Know about Dynamic Pricing
Wharton | 07.27.2005
Pennies from eBay: the Determinants of Price in Online Auctions
David Reiley, et al. | 05.17.2005
Auctions and Pricing in E-Marketplaces
Wedad Elmaghraby | 08.05.2003
Dynamic Pricing Strategies for Multi-Product Revenue Management
Constantinos Maglaras and Joern Meissner
eBay's Happy Hour: Non-Rational Herding in Online Auctions
Uri Simonsohn and Dan Ariely
Bid Together, Buy Together: On the Efficacy of Group-Buying Business Models in Internet Based Selling
Robert J. Kauffman and Bin Wang
Cyberspace Auctions and Pricing Issues: A Review of Empirical Findings
Patrick Bajari and Ali Hortacsu
Dynamic Pricing Models
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