auctions_krishnas auction theory

auctions_krishnas auction theory - Revenu es from online...

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R even u es from online auctions increased from $6.5 billion in 2000 to over $30 billion in 2003. Experts expect revenue from online auc- tions to grow by 68 percent through 2006. This dramatic increase in auction usage has caught the attention of federal officials, who purchase over $200 billion worth of goods each year. They are currently experimenting with small online auctions, but want to create agencywide e-commerce acquisition processes whose centerpiece will be online markets, including auctions. But, like the private sector, the government is uncertain about how the use of these auctions will alter the procurement process. As Dennis Rabkin of acquisition policy at General Services Administration (GSA) says, "We don't know all the answers yet. We don't really know where you can't go or shouldn't go with the tool [online auctions]; and I don't know how far or broadly the tool should be defined. We want some feedback."! To obtain this feedback, in October of 2000, the government issued Special Notice #2712, which asks private companies and individuals for their advice on iDouglas Brown, "Feds Seek Advice on Reverse Auctions," E-Commerce News, November 16, 2000. See 643
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644 I Chapter 16 Auctions an e-commerce acquisition process. Of particular interest to the government are issues of auction structure: mechanism, price transparency, auction length, and ownership. Or, as the report states, "How are pricing models, discounts, and vol- ume pricing contracts established and maintained within an eCommerce/service provider/exchange relationship?"2 These questions are echoed by managers in the private sector as they see the use of B2B auction sites explode in number. Over $30 billion in revenue was generated worldwide by these sites in 2003; some estimate this number will increase threefold by 2005. B2C auction sites are following a similar growth trajectory. Online auction sales to consumers totaled over $11 billion in 2003 and are expected to grow to over $20 billion in 2005. The message is clear: Auction markets will play an integral role in the next 20 years, and those managers who understand them best will realize added value from their use. Managers who do not understand them nm the risk of being closed out of these fast-growing markets or, even worse, seeing an erosion of firm value, as rivals use auctions to gain compet- itive advantages. And, e-commerce is not the only area experiencing an increase in auctions. Auction use is increasing in corporate acquisition activities and electronic trading markets. This chapter examines structural parameters of auctions and shows how managers can manipulate them to affect revenue generation. All auctions, like markets, are governed by rules and procedures. Managers who understand these rules can design auctions to generate higher revenues. We focus on the auc- tion mechanism, for as you will see, this parameter can signifIcantly influence the behavior of auction participants. We also show that managers need not
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This note was uploaded on 09/12/2009 for the course ECON 62240 taught by Professor Safarzadeh during the Spring '09 term at UC Irvine.

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auctions_krishnas auction theory - Revenu es from online...

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