The following video describes auctions as price discovery mechanisms: The Ideal Auction. Use the video on auctions and at least three academic or high-quality business publications (see acceptable types below) to answer the following questions in 5–7 pages. Other articles and resources can be found at the Strayer Library. There are many types of auctions, each with strengths and weakness at uncovering the real price or value of an item. Compare and contrast how each of the following uncovers value: English and Dutch auctions. Sealed-bid first-price auctions and Vickery auctions. Compare and contrast surge pricing and congestion pricing. Give an example of each currently in use.

QUESTION

The following video describes auctions as price discovery mechanisms:

• The Ideal Auction.

Use the video on auctions and at least three academic or high-quality business publications (see acceptable types below) to answer the following questions in 5–7 pages. Other articles and resources can be found at the Strayer Library.

• There are many types of auctions, each with strengths and weakness at uncovering the real price or value of an item. Compare and contrast how each of the following uncovers value:
  • English and Dutch auctions.
  • Sealed-bid first-price auctions and Vickery auctions.
• Compare and contrast surge pricing and congestion pricing. Give an example of each currently in use.
• Auctions are widely used in finance, e-commerce, and in e-games. Identify three examples of auctions used in finance, e-commerce, and/or e-games. Explain the following in-depth:
  • The need for an auction to uncover value in the product or service.
  • How the type of auction used to uncover the value of the product or service is better at uncovering value than other types of auctions.
• Auctions are also widely used to generate revenue for not-for-profit organizations. What are the advantages or disadvantages of auctions as revenue generators for not-for-profit organizations?
• Suggest ways in which a for-profit company, such as the company for which you work or a company for which you aspire to work, can use auctions or dynamic pricing to better uncover value and increase revenue.

Formatting Requirements

This course requires the use of Strayer Writing Standards. For assistance and information, please refer to the Strayer Writing Standards link in the left-hand menu of your course. Check with your professor for any additional instructions.

Acceptable Types of Publications

A high-quality, professional business publication is one that is primarily directed at reporting or analyzing the workings of business. Examples are the Wall Street Journal, Bloomberg, and Reuters. Avoid general news publications such as USA Today, the Washington Post, and the New York Times.

Please do not rely on Wikipedia, Investopedia, or similar websites as references at any time in this course.

ANSWER

Auctions as Price Discovery Mechanisms: Uncovering Value and Increasing Revenue

Introduction

Auctions serve as price discovery mechanisms that enable buyers and sellers to determine the value of a product or service. Different types of auctions exist, each with its strengths and weaknesses in uncovering the true price or value of an item. This paper will compare and contrast the English and Dutch auctions, as well as sealed-bid first-price auctions and Vickery auctions. Furthermore, the concepts of surge pricing and congestion pricing will be compared and exemplified. Subsequently, the application of auctions in finance, e-commerce, and e-games will be explored, followed by a discussion on the advantages and disadvantages of auctions as revenue generators for not-for-profit organizations. Lastly, suggestions will be provided on how for-profit companies can utilize auctions or dynamic pricing to enhance value discovery and increase revenue.

Uncovering Value in Auctions: English and Dutch Auctions

English Auction: In an English auction, the seller starts with a low opening bid, and potential buyers increase the bid until no one is willing to bid higher. The highest bidder wins the item at the final price. English auctions are commonly used in traditional auction houses and online platforms like eBay. This type of auction is effective at uncovering value as it allows for competitive bidding, which reflects the perceived value of the participants. Additionally, the open and transparent nature of English auctions facilitates information sharing and price discovery.

Dutch Auction: In contrast, a Dutch auction begins with a high asking price, which is gradually reduced until a bidder is willing to accept the price. The first bidder to accept the current price secures the item. Dutch auctions are commonly used in the sale of perishable goods or large quantities of identical items. While Dutch auctions may not achieve the same level of price discovery as English auctions, they are efficient in quickly determining the maximum price buyers are willing to pay. This method is suitable for situations where sellers aim to sell items swiftly, such as in wholesale markets.

Uncovering Value in Auctions: Sealed-Bid First-Price and Vickery Auctions

Sealed-Bid First-Price Auction: In a sealed-bid first-price auction, each bidder submits a single bid without knowing the bids of others. The highest bidder wins the item and pays their bid as the final price. Sealed-bid first-price auctions are widely used in government procurement processes and art auctions. This type of auction encourages bidders to reveal their true valuation of the item, as each participant aims to win by offering the highest bid they are willing to pay. The winner may end up paying significantly more than the second-highest bid.

Vickery Auction: A Vickery auction, also known as a second-price sealed-bid auction, is similar to a sealed-bid first-price auction. However, the highest bidder wins the item but pays the amount bid by the second-highest bidder. Vickery auctions are commonly used in online ad auctions, where advertisers bid for ad placements. This type of auction incentivizes bidders to submit their true value, as they aim to win by offering the highest bid without the risk of overpaying. The Vickery auction promotes efficiency by aligning the final price with the second-highest bidder’s willingness to pay.

Comparing Surge Pricing and Congestion Pricing

Surge Pricing: Surge pricing is a dynamic pricing strategy commonly employed by ride-sharing platforms like Uber and Lyft. During periods of high demand, such as rush hour or bad weather, prices for rides increase. Surge pricing aims to balance supply and demand by incentivizing more drivers to be available during peak times (Battifarano & Qian, 2019). This strategy benefits both passengers, who have access to transportation when demand is high, and drivers, who earn higher incomes. Surge pricing allows companies to adjust prices in real-time based on market conditions, maximizing revenue and efficient allocation of resources.

Congestion Pricing: Congestion pricing is a strategy used to manage traffic congestion in urban areas. It involves charging higher fees for driving in congested zones during peak hours. For example, cities like London and Singapore have implemented congestion pricing schemes to reduce traffic congestion and encourage the use of alternative transportation modes. By increasing the cost of driving during congested periods, congestion pricing incentivizes commuters to shift to public transportation or adjust their travel times. This strategy aims to reduce congestion, improve air quality, and enhance overall transportation efficiency.

Examples of Auctions in Finance, E-commerce, and E-games

Finance: Treasury auctions, such as U.S. Treasury bond auctions, are conducted to raise funds for the government. These auctions involve the issuance and sale of government securities to institutional and individual investors. The need for an auction in this context is to ensure the government can borrow funds at competitive market rates (Lioudis, 2023). The competitive bidding process of auctions allows the government to uncover the true market demand for its securities, which affects the interest rates and borrowing costs.

E-commerce: Online marketplaces, such as Amazon and eBay, utilize auctions to enable sellers to reach potential buyers efficiently. Sellers can list products with a starting price and allow potential buyers to bid on them. Auctions in e-commerce are advantageous as they create a competitive environment where buyers determine the true value of the item based on their willingness to bid. This process often leads to higher prices and increased revenue for sellers.

E-games: Virtual item auctions within online games, such as World of Warcraft or Fortnite, enable players to buy and sell in-game items or currency. These auctions serve the purpose of allowing players to trade valuable virtual assets and establish their market value. Players can discover the market demand and set fair prices for their items by using auctions, enhancing the overall gaming experience and facilitating player-to-player interactions.

Advantages and Disadvantages of Auctions for Not-for-Profit Organizations

Advantages

Revenue Generation: Auctions provide an opportunity for not-for-profit organizations to generate substantial revenue by auctioning off donated goods, services, or experiences. The competitive bidding nature of auctions often results in higher prices, maximizing the fundraising potential.

Engagement and Awareness: Auctions can attract new supporters and increase community engagement with the organization’s cause. By attending auctions and participating in bidding, individuals become more connected to the organization’s mission and may continue to support its activities in the future.

Disadvantages

Resource Intensive: Organizing and managing auctions can be resource-intensive, requiring significant time, effort, and dedicated personnel. The logistics of collecting auction items, marketing the event, and coordinating the bidding process can strain the organization’s resources.

Limited Reach: Auctions often target a specific audience, which may limit the potential bidder pool. Not all supporters may be able to participate in the auction, reducing the organization’s ability to reach a broader base of potential donors.

Utilizing Auctions and Dynamic Pricing for For-Profit Companies

For-profit companies can leverage auctions or dynamic pricing to uncover value and increase revenue in various ways:

Online Retail: E-commerce companies can employ auction-based pricing for limited-time promotions, flash sales, or clearance events. By allowing customers to bid on products, companies can create a sense of urgency and competition, leading to higher prices and increased revenue.

Travel and Hospitality: Airlines, hotels, and other travel-related businesses can implement dynamic pricing strategies to optimize revenue. By adjusting prices based on factors such as demand, seasonality, and inventory levels, these companies can increase profitability and maximize revenue during peak periods.

Software and Technology: Companies offering software licenses or subscriptions can use dynamic pricing to align pricing with customers’ perceived value. By analyzing customer behavior, usage patterns, and market conditions, companies can dynamically adjust prices to offer personalized and competitive pricing for their products or services (Rohitratana & Altmann, 2012). This approach ensures that customers pay for the value they receive, increasing customer satisfaction and revenue.

Conclusion

Auctions serve as effective price discovery mechanisms that uncover the value of products and services. English and Dutch auctions, sealed-bid first-price auctions, and Vickery auctions each have their strengths and weaknesses in uncovering value. Surge pricing and congestion pricing are dynamic pricing strategies employed in different industries to optimize revenue and resource allocation. Auctions are widely utilized in finance, e-commerce, and e-games to uncover value and enhance revenue. Not-for-profit organizations can benefit from auctions as revenue generators, although they may face resource constraints and limited reach. For-profit companies can leverage auctions and dynamic pricing to better uncover value and increase revenue by implementing strategies tailored to their specific industries and customer base. Companies can optimize revenue, enhance customer satisfaction, and drive business growth by embracing innovative pricing mechanisms.

References

Battifarano, M., & Qian, Z. (2019). Predicting real-time surge pricing of ride-sourcing companies. Transportation Research Part C-emerging Technologies, 107, 444–462. https://doi.org/10.1016/j.trc.2019.08.019 

Lioudis, N. (2023). Treasury Bonds vs. Treasury Notes vs. Treasury Bills: What’s the Difference? Investopedia. https://www.investopedia.com/ask/answers/033115/what-are-differences-between-treasury-bond-and-treasury-note-and-treasury-bill-tbill.asp 

Rohitratana, J., & Altmann, J. (2012). Impact of pricing schemes on a market for Software-as-a-Service and perpetual software. Future Generation Computer Systems, 28(8), 1328–1339. https://doi.org/10.1016/j.future.2012.03.019