English and Dutch Auctions
First of all, it is necessary to characterize each type of auction, some of the most famous among them are the English and Dutch auctions. The Dutch system involves an auction in which the seller determines the so-called cut-off price. If at the beginning of the auction some of the participants agreed to the initial price, the auction is held on the rise according to the English system (Chattopadhyay & Chatterjee, 2019). And if none of the bidders agreed to the initial price, the auction will be held on the decrease until the cut-off price is reached in the process of price decrease, if during the auction none of the bidders agreed to one of the offered prices (Chattopadhyay & Chatterjee, 2019). After that, the bidding continues to increase the value of the product until none of the bidders raise a card. In this case the winner is determined, which is the client who offers the highest price.
At the same time, the English system implies an auction, in which a minimum initial price is set, and in the process of bidding, the price is gradually increased. The final price is formed in the course of bidding and is determined as the last maximum price offered by participants. This takes place through the raising of the card by the participant of the auction for the price announced by the organizer of the auction (Chattopadhyay & Chatterjee, 2019). When the person conducting the auction determines the first participant who raised his card, the price of the lot increases by one step. The step of the auction is specified in the conditions of the auction. The end of the auction takes place after the auctioneer announces three times the price of the lot, and after that none of the participants offer a higher price by raising their card with an increase of the price of the lot by one step (Chattopadhyay & Chatterjee, 2019). In the event none of the participants agrees to pay the starting price for the lot, the auction shall be deemed failed. In this case the auction is terminated and the organizer of the auction declares it failed.
Unlike English auctions, the Dutch auction will take place even when only one buyer comes to one lot. That is, there is no limit on the number of participants. The players of such an auction can be private individuals and professional representatives of the market (Chattopadhyay & Chatterjee, 2019). The Dutch auction showed its effectiveness in the electronic trading of assets for which it is difficult to determine a fair market value.
Closed First Price Auctions and Vickrey Auctions
It is necessary to consider a closed first-price auction – this is a mathematical model of the behavior of participants, all buyers offer prices simultaneously, and the goods are sold to the one whose price was higher. An important feature of this type of auction is the participation of only those individuals who have the appropriate status. The main essence of a closed auction is the reduction of the contract price for each corresponding step of the auction. In other words, the auctioneer reduces the value of the goods by 0.5 percent each time the final value does not suit the participants (Numberphile, 2017). The winner of such auctions shall be the one who offered the lowest price, and no one shall change the decision after the triple announcement.
Vickrey auction also refers to one of the main types of auctions. The main difference of such bidding is that bids are submitted only once, and buyers submit or offer bids in closed envelopes. In addition, the nature of winning in such an auction is extremely unusual (Numberphile, 2017). It is important to emphasize that even though the winner is determined by classical methods, the price of the goods will be the second highest offer. It is important to note that such auctions are extremely unpopular in practice, but very effective.
Surge Pricing and Congestion Pricing
It is necessary to analyze the main task of dynamic price formation, which consists in doubling the needs of consumers despite the circumstances. This is regulated through the technique of controlling the price coefficient, which serves as a multiplier for the final price. This is done to control supply and demand, so as not to cause an oversupply on any side. One of the clearest examples of modern times where surge pricing has been used most successfully is Uber (Fels, 2019). When the demand for cars is extremely high, the price is rearranged so that customers can also order a cab, but at a higher price, so that there is no situation where there are no available cars.
Based on economic pricing theory, congestion pricing is a dynamic pricing strategy designed to regulate demand by increasing prices without increasing supply. The word “congestion” comes from the use of this strategy as a way to regulate traffic. This strategy is also used in hospitality and utilities, where demand varies according to the time of day or season of the year. Electricity rates may be higher in the summer, for example, because of more frequent use of air conditioning; hotel rooms may be more expensive during major holidays (Fels, 2019). Hotels raise room rates on days when the city hosts conventions and during major holidays or for special events – such as when the city hosts the Olympics – during which they anticipate an increase in tourism.
The Use of Auctions in Different Areas
It should be noted that bidding is actively used in various spheres as an effective economic tool. For example, in the sphere of finance, ministries use auction schedules to calculate the amount and bonds of federal or state loans. In other words, auctions contribute to the calculation of public debt. Auctions are also often used in e-commerce, an Internet auction is an information-based trading system in which a purchase or sale transaction is conducted on a competitive basis using an information network (Fels, 2019). This type of electronic trading platforms is characterized by the fact that the price for the goods or services sold is not fixed, but is set in the bidding process. The most popular example of such an auction is eBay, where in 2001 about 3.5 million types of goods in more than 2,900 different categories were put up for auction every day (Fels, 2019, p. 34). On the other hand, the world’s largest firms for auctions are also moving to the Internet, leveraging the experience of the “frontrunners of e-commerce. One example of this is a joint project of Sotheby’s and Amazon.com or a similar project of Lycos portal and the fourth largest auction house in the United States – Skinner.
The behavior of participants in auctions is very well studied by economists and psychologists. For example, it is known that auctions more often end up with higher average selling prices in the cases when the costs of information disclosure are the same for buyers and sellers. The main reason for this performance is that auctions are a very effective mechanism for identifying the partner with the most extreme starting price. In other words, to identify sellers with the lowest starting price or buyers with the highest starting price. In the case of an auction, the process aims to attract as many interested parties – sellers or buyers – as possible and get them to compete with each other.
The difference in auctions encouraging people to participate is that they do not require the same level of preparation as negotiations. If a person has to do the preparation, it will involve learning about the quality of the lot to be bid on. Individual do not have to develop a negotiating strategy, determine the type of issues to discuss, your partners’ strategies, and do a lot of other things. However, auctions do have some significant limitations, it is not appropriate for deals that cover multiple issues (Fels, 2019). Auctions are most effective when only one issue, such as price, is being discussed. If multiple issues need to be addressed, they are still better reduced to one issue. Consequently, bidders still need to compile an issue-value matrix that allows such different bids to be compared. However, such cases with multiple questions complicate auctions and can even turn them into a real ordeal. This explains the dependence of pricing on the type of auction.
Advantages and Disadvantages of Auctions as a Source of Income
Before highlighting the advantages and disadvantages of auctions, it is necessary to emphasize that there are not many of them. The fact is that the results of auctions are usually the most unpredictable, but the bidding mechanism does not have enough flexibility to allocate a large number of characteristics. From this comes the first disadvantage, which is the unexpectedness and unpredictability of the potential income. The final value depends on the buyers’ offer, which in the end is not always able to satisfy the seller, and to cover the costs of the auction itself. This cannot be called a definite disadvantage, because not infrequently, as a result of the auction organization receives a large benefit. Therefore, it is worth highlighting this phenomenon as both a disadvantage and disadvantage at the same time, depending on the specific result. Nevertheless, the obvious advantage is the diversity of types of auctions. Based on them, any organization is able to minimize risks by choosing the appropriate type. However, this requires professionals who are able to select the necessary type of bidding for a specific situation.
Ways to Increase Revenue through Dynamic Pricing
Based on the information I have analyzed, I can confidently say that I would not use or offer auctions of any kind as a method of income because of the large number of unpredictable risks. Nevertheless, dynamic pricing is an extremely effective tool, applicable in a wide range of businesses. In the case of services, of all types, the organization I work for finds itself in a situation where it needs to recalculate the price, it’s always a win. First, the price is recalculated in favor of the corporation, which is good for not talking about losses. Second, it preserves customers under the general rule of dynamic pricing. Thus, I would suggest such a way as surge pricing.
Chattopadhyay, S., and Chatterjee, R. (2019). Understanding auctions. Taylor & Francis.
Fels, A. C. (2019). Dynamic pricing with capacity constraints. An application to ticketing. Universität St. Gallen.
Numberphile. (2017). The ideal auction [Video]. YouTube.