Buyer Surplus Research Articles

Introduction to the Special Issue on E‐Auctions for Procurement Operations

We present nine papers on e‐auctions for procurement operations. The first of the issue's three sections is a foreword highlighting current trends and future research directions. The second section is composed of three commissioned survey papers, covering auctions within e‐sourcing events, electronic markets for truckload transportation, and games and mechanism design in machine scheduling. The final section consists of five research papers on the following topics: whether auction parameters affect buyer surplus in e‐auctions for procurement, collusion in second‐price auctions under minimax regret, the effect of timing on jump bidding in ascending auctions, market‐based allocation with indivisible bids, and ranked items auctions and online advertisement.

Advertising as a Signal in an Internet Auctions Market

In this paper we undertake an empirical study of advertising in an online auctions market, or, more precisely, advertising on eBay. The type of advertising that we consider works as follows: at the time of listing the item on eBay, sellers are offered the option of incurring an extra fee in return for having their product listed first when buyers search for specific items. Our empirical methodology combines a model of choice on the part of the seller as to whether or not to advertise with a novel model of demand in an auction market environment. Because we explicitly model the process of arrival of new bidders, we can estimate the effect of advertising on the number of bidders, the distribution of bidders' valuations, and the final selling price. Using the structural model, we can also measure the effect of this form of advertising on the revenues of the seller and the market intermediary, as well as its effect on consumer surplus. Our results indicate that advertising in this market represents a signal of quality and facilitates the match between buyers and sellers. Accordingly, revenues for sellers and the market intermediary increase, and interestingly buyer surplus increases as well.

Advance-selling as a competitive marketing tool

Advance selling before the time of consumption is now possible for even very small service providers, given new technologies (specifically, web-based transactions, biometrics and smart card technology). Moreover, recent research has revealed that advance selling can substantially improve profits without traditional price discrimination. However, that research was limited to monopoly settings. This paper explores the impact of competition on advance selling driven by consumer uncertainty about future consumption states (rather than price discrimination). We employ several different demand specifications to provide three major findings. First, unlike yield management (driven by price discrimination), the relative profit advantage from advance selling (driven by consumer uncertainty about future consumption states) in a competitive market can be higher or the same as that in a monopoly market. For every demand specification that we investigate, competition does not diminish the advantage of advance selling. The reason is that price discrimination leaves some groups (i.e., those being discriminated against) vulnerable to competitors (e.g., price discounts) and competition weakens discrimination. In contrast, consumer uncertainty applies to all consumers in the advance period so a competitor is unable to focus attention on only one group of consumers. However, in some demand specifications, the existence of competitors can limit the situations when an advance selling equilibrium exists because of the ability to unilaterally spot sell and damage profits of the seller who advance sells. Second, in some demand specifications, advance selling can create a win–win–win situation where the profits of two competitors increase while consumer surplus increases because advance selling allows greater market participation. Third, competition can strengthen the conditions under which advance selling is advantageous compared with spot selling. Hence, advance selling can be a very effective marketing tool in a competitive setting (albeit under more restrictive conditions than in a monopoly setting). It is a tool that can diminish competition and, unlike price discrimination, increase buyer surplus.

An optimal auction with correlated values and risk aversion

We consider an auction setting where the buyers are risk averse with correlated private valuations (CARA preferences, binary types), and characterize the optimal mechanism for a risk-neutral seller. We show that the optimal auction extracts all buyer surplus whenever the correlation is sufficiently strong (greater than 1/3 in absolute value), no matter how risk averse the buyers are. In contrast, we note that a sufficiently risk-averse seller would not use a full rent extracting mechanism for any positive correlation of the valuations even if the buyers were risk neutral.

A Model of B2B Exchanges

B2B exchanges are revolutionizing the way businesses will buy and sell a variety of intermediary products and services. It is estimated that most of the roughly $7 trillion worth of business transactions are likely to go through these new institutions within the nest decade. This paper tries to understand the economics governing the transactions within B2B exchanges and analyze their likely evolution over time. In doing so, we start by providing the rigorous definitions to a number of concepts broadly used in the context of B2B exchanges including fragmentation, critical mass and buyer-seller connectivity. We describe equilibrium behavior in the exchange and analyze it as a function of these concepts. Next, we study the evolution of the exchanges in a dynamic system where buyers and sellers enter (exit) the exchange based on the relative economic surplus (loss) they receive inside vs. outside the exchange. Our results have important implications for practice. For example, we show that equilibrium prices within the marketplace may not always decrease with lower search costs. However, buyer surplus rises with lower search costs even if prices are higher in the exchange. We also show that the general view that demand and supply (so-called liquidity) either grows or shrinks in the marketplace may not always hold and it is quite possible to have a marketplace that is stable even though only a relatively small proportion of the market participants transact in it. Finally, we also provide conditions under which the exchange should subsidize buyers or seller in order to achieve mass.

Advanced Selling Strategies with Competition

With advancement in new technologies (specifically, Internet and Smartcard technology), small service providers can develop the capability to implement complex pricing strategies, previously enjoyed by only large service providers. Advance selling is one of those strategies. This paper investigates advance selling in a competitive setting. Prior research has shown that, given the capability, advance selling can be a powerful tool for a monopolist and can improve profits (by as much as 100%). This situation occurs under surprisingly general conditions that are not industry specific. However, advance selling in competitive situations may create other forms of competition such as competition with competitors in the advance period and sellers competing with themselves across time. We allow one seller to have market power in the sense that buyers are willing to pay a premium to buy from that seller. In that context, we ask some questions. For example, we ask: Do conclusions regarding whether monopolists should advance sell generalize to competitive situations? Can a seller improve profits by unilaterally developing the capability of advance selling and what is the impact on competitors' profits? When all sellers develop this capability, will gains in profits vanish? Is it more important for some types of sellers to advance sell than other types? What is the impact on consumer surplus of one or more sellers advance selling? We find that, as with the case of a monopolist, any seller that has the unilateral capability to advance sell should do so provided that they have sufficient differentiation to maintain a sufficiently high spot price. When only one seller advance sells, that seller improves profits. The improvement is sometimes at the expense of the other seller, but not always. When a seller without market power advance sells, it can hurt the profits of the competitor. When a seller with market power advance sells, it does not hurt the profits of the competitor. When both sellers advance sell, everyone can potentially gain. The profits of both sellers increase and buyer surplus can increase as well. It is more important for the seller with market power to develop the capability of advance selling because that seller would be hurt if the competitive seller unilaterally developed that capability. However, from a consumer viewpoint, it might not be desirable for the seller with market power to unilaterally develop the capability of advance selling. When only the seller with market power advance sells, that seller may improve profits at the expense of buyer surplus. When both sellers advance sell, buyer surplus does not decrease and can increase (when market power is not too large). Beyond providing profit and buyer surplus implications, we also provide pricing implications in these different scenarios.

Electronic Tickets, Smart Cards, and Online Prepayments: When and How to Advance Sell

Electronic Tickets, Smart Cards, and Online Prepayments: When and How to Advance Sell

Production-to-order or production-to-stock: the endogenous choice of institution in experimental auction markets

Markets are organized so that buyers and sellers have a choice of participating in production-to-stock or production-to-order auctions. A production-to-stock (PTS) institution requires the seller to hold inventory before trading. Data from computerized double auctions are analyzed. Inventory cost diminishes trading activity. When the choice of institution is endogenous, sales from stock are about 15 percent of the total. When there is only a PTS market, econometric estimates show sellers as a group seek higher prices and seller surplus is relatively high. A production-to-order choice increases buyer surplus and market efficiency.

A Competitive Distribution of Auctions

In this paper a competitive distribution of auctions is described for an economy consisting of an infinite number of buyers and sellers, all of whom differ according to their valuation for the single indivisible object being traded. A competitive distribution of auctions is such that no seller can improve his profits by deviating to any alternative direct mechanism. It is shown that the competitive distribution of auctions will have the property that each buyer and seller's best reply is independent of his beliefs about the tastes of other buyers and sellers on the market. The purpose of this paper is to provide an equilibrium for an economy in which sellers compete by offering different direct mechanisms to buyers. No attempt is made to give a complete characterization of all possible equilibria, rather we focus on one equilibrium in which the contracts that are offered by sellers in equilibrium, and buyer's behaviour under these contracts, are both independent of traders' beliefs about one another. The equilibrium illustrates one of the reasons why contracts that are employed in practice may not be as finely tuned to beliefs as the theory of mechanism design says that they should be. The answer is simply that contracts are not offered in a vacuum. Sellers in the model studied in this paper need to compete with one another in order to attract buyers. Highly-tuned mechanisms tend to extract buyer surplus. In such an environment, sellers are able to attract many buyers by offering to use cruder mechanisms that leave some surplus for buyers. In this paper, sellers are allowed to have different costs for the commodity that is being traded. Nonetheless, the equilibrium (for the limit economy in which there are infinitely many buyers and sellers) is such that every seller offers a second-price auction and publicizes a reserve price equal to his cost. In a standard monopoly auction the optimal reserve price for the seller exceeds his cost by an amount that depends on his beliefs about buyers' valuations (Myerson (1981)). A seller who raises his reserve price has his profits affected in two distinct ways. By raising his reserve price the seller makes it unprofitable for some buyer types to participate in his auction. The seller therefore loses any surplus that he might have earned by trading with these buyers. The buyers who still find it profitable to participate in the seller's auction will end up having to pay a higher price when they win because of this increase in the seller's reserve price. This means that the seller will be able to extract a bit more surplus from buyers who continue to participate. The seller raises the reserve price until the marginal cost associated with raising the reserve price is just equal to the marginal gain associated with the ability to extract more surplus from remaining buyers. Competition mitigates this argument since there is a limit to the amount of surplus that the seller can extract from remaining buyers before they decide that they should instead choose one of the alternative auctions that are being held on the market. With

Enhancing bargaining power with most-favored-customer pricing

A monopolist faces a finite sequence of identical buyers and negotiates with each buyer individually. Most-favored-customer pricing allows the firm to exploit its position as the repeat player in the game and extract more of each buyer's surplus.