Online Auctions for Business-to-Business Transactions

By Johnson, Norman Anthony; Friedman, Hershey H. | The National Public Accountant, June 2002 | Go to article overview
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Online Auctions for Business-to-Business Transactions


Johnson, Norman Anthony, Friedman, Hershey H., The National Public Accountant


Online Auctions for Business-to-Business Transactions.

The Internet has dramatically changed the way business is being conducted today. According to predictions made by several research firms, the business-to-business (B2B) electronic commerce market will exceed $4 trillion by the year 2005. Because a large portion of B2B transactions will be conducted through auctions, business people need to understand the basics of auctions.

Businesses can use auctions to do everything from selling excess inventory to purchasing capital equipment. There is a $5 trillion market for industrial parts and, for manufacturers, the cost of industrial parts makes up about 35 cents of every sales dollar. Thus, the savings from e-procurement can be substantial. In the automobile industry, according to research at Ford, the paperwork in a single offline purchase order is about $150, whereas an online order costs somewhere between $5 and $15. Thus, firms that make efficient use of auctions can save huge amounts of money by buying raw materials and industrial parts at reduced prices and selling excess inventory at higher prices--with much-reduced paperwork expenses.

Several years ago, airlines started auctioning off empty seats. A seat on a plane is a perishable commodity; once a plane takes off with an empty seat the revenue from that seat is lost forever. By auctioning seats, airlines can dramatically increase their revenues.

There are many different types of auctions and this article describes some of the major ones. The decision as to which type of auction to use depends on several factors, including whether one is working for the buyer or seller, the importance of speed, and whether there is concern that bidders will get together and collude.

It should be noted that not all industries use the terms mentioned in this article in the same manner. In particular, the financial industry uses the terms differently.

English Auctions

English auctions, also known as ascending-price auctions, are the most common type of auction. Buyers publicly announce the highest price they are willing to pay for the item. Prices go successively higher and the auction ends when no higher bid is made. The merchandise goes to the highest bidder at his or her bid price. English auctions usually enable the seller to specify a minimum price, i.e., a reserve price. If this price is not reached, the item might be removed from the auction. Sometimes, the auction will open at the reserve price.

A major problem with the English auction, for the seller, is that bidders do not have to bid as high as their private valuation. Suppose a machine is worth $10,000 to a potential buyer. If the highest bid is $4,500, all the potential buyer has to do is bid $4,600; there is no reason to bid the full $10,000. On the other hand, there is also a potential problem for buyers, known as the winner's curse. The excitement and competitive atmosphere of the auction process can cause the buyer to pay considerably more than the item is actually worth. After all, many people are competitive and have the need to outbid and thereby beat out a rival for a product.

In general, sellers do not do as well with English auctions as buyers and are better off with other types of auctions. Also, the traditional English auction does not work well when a seller has multiple quantities of an item to sell. Multiple quantities, however, are not a problem with auctions on the Internet. Another issue with auctions is the problem of pricing transparency. Some sellers want to keep their pricing information confidential and this is a problem with most types of auctions.

Dutch Auctions

A Dutch auction is a descending-price auction and bidding starts at a high price. The price is progressively dropped (often by means of a computerized auction clock with a hand that starts at a high price) until a buyer yells "stop" or presses a button to stop the clock.

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