Auctions and Dynamic Pricing

Auctions and Dynamic Pricing

Auctions and Dynamic Pricing

Currently, the electronic market or the e-market has been expanding, demanding the use of more efficient pricing mechanisms. The static time differential pricing mechanisms, also referred to as fixed mechanisms, are simplistic; thus, a lot of the e-markets use them. Fixed pricing is sometimes inefficient because the buyers’ demand keeps varying over time. Besides, the fixed pricing lead to low utilization of the resources at the time when demand is low and result in underpricing at the time when demand is high. The demand of the buyers keeps shifting from time to time; thus, there is a need for a dynamic pricing mechanism that is more efficient, and that adapts to the market conditions that keep on changing. The dynamic pricing mechanism ensures resource utilization is high, and the sellers’ Revenue is high too in diverse market conditions (Li et al., 2016). The dynamic pricing mechanism ensures that there is an optimal outcome for the parties involves in a transaction. At the same time, the dynamic pricing mechanism makes it hard for the buyer to plan the budget and for the seller to decide on the pricing. Therefore, auctions emerge to reduce such difficulty by making sure that price is determined by the buyer’s willingness to pay (McAfee, 2017). The paper intends to carry out a comparison of how English and Dutch auctions and how sealed-bid first-price and Vickery auctions uncover value, the contrast of surge pricing and congestion pricing, and explain the need for an auction. It also discusses auction as a revenue generator for not-for-profit organizations, and how such companies could use it to uncover prices better and ensure revenue increase.

Compare and Contrast How English and Dutch Auctions and How Sealed-Bid First-Price and Vickery Auctions Uncover Value

The auctions are classified into either single or double ones depending on the number of bidding sides. A single auction ensures that the parties can only take one side of action either as a buyer or seller. A double auction ensures that parties are free to choose any side of an auction. Besides, a single auction is categorized onto a sealed bid and an open cry. The open-cry auctions are divided into two types; English and Dutch auctions (Malekovic et al., 2019). On the other hand, the sealed bid auctions are divided into FPSB or First Price and SPSB or the Second Price or Vickrey auction.

The English auction is the most common type which is utilized when selling wine, artworks, and antiques, among other goods. In the English auction, the auctioneer initiates the bidding process at the lowest price the item can be sold at (reserve price, which can be zero). The bidders start announcing their interests by mentioning the prices they are willing to buy the item McAfee (2017). Therefore, the auctioneer raises the prices as the bidders show interest in the item. The process proceeds until no more bidders are willing to increase their announced prices any further (Malekovic et al., 2019). The auction is closed, and the final bidder with the highest price receives the item.

On the other hand, Dutch auction uncovers the value of an item in an entirely different way compared to the English auction. Unlike in the English auction where the auctioneer begins with the lowest price and bidder bid in an ascending manner, the Dutch auction is descending. Therefore, in the Dutch auction, the auctioneer initiates the process by announcing a higher price that he or she believes the item deserves. The bidder mentions their prices decreasingly until a bidder calls out loudly, “mine.”  The item is offered at the price at which the last bidder made a call. Unlike the English auction, which consumes a lot of time, the Dutch auction takes place very fast because bidders are few compared to the items (Li et al., 2016). For example, the Dutch auction is utilized in more places of flowers, like in the Holland markets, because it takes little time.

Bidders on the English and Dutch auctions are provided with information about other people bidding or rejecting to bid. In contrast, in a First price Sealed Bid (FPSB) auction, no information is received when others bid or refrain from the bidding process. In the case of FPSB, the parties participating in a bid offers a single bid sealed in an envelope (Banerjee, 2020). The auctioneer opens all the envelopes and announces the highest bidder. The individual receives the item as per his or her bid price. The FPSB is used on financial venues for refinancing credits, among others.

Similar to FPSB, Vickrey auction takes place in a situation where bidders provide their bids on sealed envelopes. Besides, just like all English auction and FPSB, the highest bidder receives the items. The Vickrey auction is different from FPSB, English auction, and Dutch auction because the highest bidder gets the item at the price of the second-highest bidder McAfee (2017). In an occasion of multiple items, the highest bidder receives the items at the price of the highest unsuccessful bid.

Compare and Contrast Surge Pricing and Congestion Pricing

Surge pricing takes place when an organization increases the price of its items and services when there is an increase in demand. For example, when the supply of driver is deteriorating at Uber, the company starts raising the price of its services. Therefore, more drivers are encouraged to begin working at Uber; thus, increasing their supply. On the other hand, congestion pricing is a kind of dynamic pricing strategy that regulates the demand for a service or product by increasing the prices (Brent & Gross, 2018). For instance, as surge pricing intends to increase the supply drivers by increasing the price of the services, congestion pricing helps in regulating the demand without aiming to increase the supply. For example, congestion pricing is applicable in the transportation industry to decrease congestion and pollution by increasing transportation prices in congested areas.

Explain the need for an Auction to Uncover Value and How the Type of Auction Use Is Better Than Other Options for Examples in Finance, E-Commerce and Or/E-Games

Companies make use of auctions to know the real value of a product or service. That enables the company to sell its services or products and increase their income (Revenue) through sales. Through auctions, individuals can increase their purchases and chances to get promotions. The retailers of e-games and e-commerce benefit a lot from auctions. As many firms may choose to conduct private auctions, the firms which operate online can expand their audience. The online firms analyze the bidding patterns on auctions and identify the potential customer of their product or services (Li et al., 2016). Besides, the auction offers a strategic way of improving the value of product or service when presenting it for sales to the customer. By tapping into various types of auction company gets to enhance the prices and terms of selling. The auction determines the value of the product, which is essential to the buyer because they value the product based on what they see on the event.

Various types of auctions are used for products and services. One of the commonly used to ensure that the highest bidder purchases products and services are an absolute auction. The auctioneer has no intension of achieving any minimum price in the absolute auction. Thus, the services or product presented to the bidders has a huge chance of being sold. The absolute auction ensures that there is a high bidders’ competition, and their interest is high. Minimum bid auction is another type of auction where the bidding process is initiated by announcing the minimum price that the seller is willing to sell the product (reserve price) (Li et al., 2016). The reserve price is mentioned in the advertisements and is repeated when the auctioning process is about to start. The price mentioned as the reserve price for the product makes sure that the seller is compensated fully, but it should ensure that many bidders will be attracted to the auction.

Explain the Advantages and Disadvantages of Auctions as a Revenue Generator for Not-For-Profit Organizations

Auction has various advantages and disadvantages as a not-for-profit organization’s revenue generator. Not-for-profit organizations have limited funding from local grants and government. Auction ensures that these organizations can raise their funding. Besides, through the means of the auction the organization gains much awareness that helps in attracting other potential donors because they get to know about their cause and purpose (Meyer, 2019).

Auctioning may also be undesirable to not-for-profit organizations. The auction events need a lot of work to make them happen. The cost of conducting the auction event is high and may not be worth it. Besides, the auction event may be interfered with by external forces such as short timescale, competition consent needs, and regulatory factors. The auction event may also lead to bidder paying more than the value of the product. For example, an individual may get so much interested in the bidding process and end up bidding a high price for a product that is not worth that much. That can reflect loss on the buyer’s side.

Propose ways in Which A For-Profit Company Could Use Auctions or Dynamic Pricing to Better Uncover Value and Increase Revenue

Auctions play the role of increasing the company’s Revenue and uncover the value. The not-for-profit company can use some auctioning approaches to identify the value of their services and products and increase its Revenue. The company should analyze various types of auction to know the most efficient bidding method, which can help raise their Revenue. For example, the company should choose between English and Dutch auction, and analyze which may increase opportunities for raising Revenue. I can propose the use of English auction as it allows buyers to interact. Thus, it increases the chance of bidder influence and bidding against one another (Meyer, 2019). It is a method that ensures that the highest price or value is reached, which reflects high Revenue to the company.

I could encourage the not-for-profit organization to conduct the auction process through the use of digital technology. It is easier for the bidder to bid online as it provides an equal chance to everyone. The company can access huge markets when it operates using technology or online auctions regardless of its size. The online auction can help the company determine potential bidders, buyers, and donors.

In conclusion, auction as a pricing mechanism has proved to be more effective than traditional methods. The fixed pricing mechanism was inefficient as the buyer’s demand is dynamic. Thus, there was need for a dynamic pricing mechanism that increases the seller revenue. There are various types of auction that include English and Dutch auction, and First Price sealed bid and Vickery. These types of auctions are different, as discussed above. The paper has compared surge pricing, and congestion pricing explained the need for auction, and explained its advantage and disadvantage for not-for-profit organizations.

References

Banerjee, P. (2020). Unit-9 Mechanism Design. Indira Gandhi National Open University, New Delhi. http://14.139.40.199/bitstream/123456789/59898/1/Unit-9.pdf

Brent, D. A., & Gross, A. (2018). Dynamic road pricing and the value of time and reliability. Journal of Regional Science, 58(2), 330-349. https://www.researchgate.net/publication/320049519_Dynamic_road_pricing_and_the_value_of_time_and_reliability

Li, X., Ding, R., Liu, X., Liu, X., Zhu, E., & Zhong, Y. (2016). A dynamic pricing reverse auction-based resource allocation mechanism in cloud workflow systems. Scientific Programming, 2016. https://www.hindawi.com/journals/sp/2016/7609460/

Malekovic, N., Goutas, L., Sutanto, J., & Galletta, D. (2019). Regret under different auction designs: the case of English and Dutch auctions. Electronic Markets, 1-11. https://link.springer.com/article/10.1007/s12525-019-00355-w

McAfee, P (2017). The Ideal Auction- Numberphile. Youtube. https://www.youtube.com/watch?v=4kWuxfVbIaU

Meyer, J. (2019). Why your nonprofit should consider holding a charity auction. GuideStar. https://trust.guidestar.org/why-your-nonprofit-should-consider-holding-a-charity-auction