Buyer's Risk Research Articles

Enhancing Trust in Online Auctions: eBay’s Australian Experience With Code and Law

Operators of online auction venues, such as eBay, face competing demands. Most of those operators are reliant on income from fees paid by sellers and therefore must provide technical innovations and a contract structure favourable to those sellers. Simultaneously, the operators must lower the risk of bidding on auctions hosted by the site to ensure a steady supply of potential buyers (and successfully completed auctions). Lowering the risk to the buyer and the seller in an online auction will tend to lower their transaction costs (the cost of engaging in the transaction itself) and may enable the auction website to generate network effects which increase its market share. This article examines the decisions resolving two disputes relating to online auctions hosted by eBay Australia. It highlights the inter-relationship between the common law and statutory law in regulating online auctions to provide higher degrees of trust (over and above that generated through the use of architecture, norms and markets), thus lowering overall risk and transaction costs for both buyers and sellers.

A non-parametric estimator for setting reservation prices in procurement auctions

Electronic auction markets collect large amounts of auction field data. This enables a structural estimation of the bid distributions and the possibility to derive optimal reservation prices. In this paper we propose a new approach to setting reservation prices. In contrast to traditional auction theory we use the buyer's risk statement for getting a winning bid as a key criterion to set an optimal reservation price. The reservation price for a given probability can then be derived from the distribution function of the observed drop-out bids. In order to get an accurate model of this function, we propose a nonparametric technique based on kernel distribution function estimators and the use of order statistics. We improve our estimator by additional information, which can be observed about bidders and qualitative differences of goods in past auctions rounds (e.g. different delivery times). This makes the technique applicable to RFQs and multi-attribute auctions, with qualitatively differentiated offers.

Possibly‐Final Offers

A price‐setting seller faces a buyer with unknown reservation value. We show that if the buyer is sufficiently risk averse, the seller can benefit from employing a Possibly‐Final Offer (PFO) strategy. In a PFO, if the buyer rejects the seller's initial offer the seller sometimes terminates the interaction. If the seller does not terminate, he follows up with a subsequent, more attractive offer. As the buyer's risk aversion increases, the seller's expected profit under the optimal PFO approaches the full‐information profit. These results extend to contexts with endogenous commitment, multiple types of buyers, multidimensional objects, and nonseparable utility functions.

Determinants of escrow service adoption in consumer-to-consumer online auction market: An experimental study

Risk relief services (RRSs), as complementary to online trust promoting services, are becoming versatile options for risk reduction in online consumer-to-consumer auctions. In this paper, we identify factors that affect the behavior of buyers in an online auction market who had to either adopt or not adopt online escrow services (OES). An experimental C2C auction system with embedded decision support features was used to collect data. Results show that market factors, such as fraud rate, product price, and seller's reputation are important in determining buyers' OES adoption. This study also finds that sellers' reputation has a significant effect on buyer's risk perception, which influences his OES adoption decision. Furthermore, the buyers' OES adoption decisions were found to be congruent with the implied recommendations that were based on expected utility calculations.

Sellers in Online Auction Markets: Introducing a Feedback-Based Classification

Increasing significance of the online consumer-to-consumer (C-2-C) auction market has amplified the need for buyers and sellers to engage in transactions with anonymous counterparts. The sequence of paying first and then taking delivery, introduces a great amount of risk for potential buyers. In order to mitigate this risk, online auction markets (OAMs) are employing an assortment of governance mechanisms, of which reputation scoring and reporting systems are the most popular. Researchers have found substantial evidence from theoretical models as well as empirical studies that higher the reputation rating of a seller, higher the bid prices he/she receives. However, a review of the current literature suggests a conspicuous absence of any standard classification of sellers in OAMs. Lack of such a classification hinders systematic research and theory development. Therefore, a comprehensive classification of sellers, based on feedbacks, is proposed to advance our understanding of online C-2-C auction market and to provide a basis for further research. In addition, the proposed classification is hierarchical rather than monothetic in nature and hence, gives greater systemic power to the classification. Toward demonstrating the classification’s systemic power, we present a propositional inventory developed from the classification. We also discuss how the proposed classification accommodates current research and furthers theory building in this research area.

Sample Size Requirements for Seismic and Traditional Testing of Concrete Pavement Strength

The strength of portland cement concrete (PCC) is one of the major acceptance quality characteristics in most existing specifications and quality assurance programs for PCC pavement. A statistical method is provided for determining the sample size requirements for reliable estimates of PCC parameters for pavement strength. These parameters include compressive strength from cylinders, flexural strength from beams, and dynamic seismic modulus from both portable seismic pavement analyzer and the free-free resonant column seismic nondestructive testing (NDT) methods. The sample size, which refers to the number of tests or measurements for each quality characteristic taken randomly from a lot, is a function of specifications tolerance, buyer's (i.e., agency's) risk, seller's (contractor's) risk, and the standard deviation of the test parameter under consideration. In practice, sample size typically is set on the basis of practical considerations and engineering judgment. Although practicality is an important c...

Sample Size Requirements for Seismic and Traditional Testing of Concrete Pavement Strength

The strength of portland cement concrete (PCC) is one of the major acceptance quality characteristics in most existing specifications and quality assurance programs for PCC pavement. A statistical method is provided for determining the sample size requirements for reliable estimates of PCC parameters for pavement strength. These parameters include compressive strength from cylinders, flexural strength from beams, and dynamic seismic modulus from both portable seismic pavement analyzer and the free–free resonant column seismic nondestructive testing (NDT) methods. The sample size, which refers to the number of tests or measurements for each quality characteristic taken randomly from a lot, is a function of specifications tolerance, buyer's (i.e., agency's) risk, seller's (contractor's) risk, and the standard deviation of the test parameter under consideration. In practice, sample size typically is set on the basis of practical considerations and engineering judgment. Although practicality is an important consideration, there is a need to verify the adequacy of these practices on the basis of sound statistical analysis. The cost of sampling and testing is also discussed. The results of the study reveal that the sample size used in FAA's Item P-501 (which is four beams or cylinders per lot) is relatively small and needs to be increased. A larger sample size can be most cost-effectively achieved if seismic NDT is used because of the rapid and nondestructive nature of these testing methods.

Evaluation of Sampling Plans to Detect Cry9C Protein in Corn Flour and Meal

StarLink is a genetically modified corn that produces an insecticidal protein, Cry9C. Studies were conducted to determine the variability and Cry9C distribution among sample test results when Cry9C protein was estimated in a bulk lot of corn flour and meal. Emphasis was placed on measuring sampling and analytical variances associated with each step of the test procedure used to measure Cry9C in corn flour and meal. Two commercially available enzyme-linked immunosorbent assay kits were used: one for the determination of Cry9C protein concentration and the other for % StarLink seed. The sampling and analytical variances associated with each step of the Cry9C test procedures were determined for flour and meal. Variances were found to be functions of Cry9C concentration, and regression equations were developed to describe the relationships. Because of the larger particle size, sampling variability associated with cornmeal was about double that for corn flour. For cornmeal, the sampling variance accounted for 92.6% of the total testing variability. The observed sampling and analytical distributions were compared with the Normal distribution. In almost all comparisons, the null hypothesis that the Cry9C protein values were sampled from a Normal distribution could not be rejected at 95% confidence limits. The Normal distribution and the variance estimates were used to evaluate the performance of several Cry9C protein sampling plans for corn flour and meal. Operating characteristic curves were developed and used to demonstrate the effect of increasing sample size on reducing false positives (seller's risk) and false negatives (buyer's risk).

Contingent Pricing to Reduce Price Risks

The price for a product may be set too low, causing the seller to leave money on the table, or too high, driving away potential buyers. Contingent pricing can be useful in mitigating these problems. In contingent pricing arrangements, price is contingent on whether the seller succeeds in obtaining a higher price within a specified period. We show that if the probability of obtaining the high price is not too high, sellers profit from using contingent pricing while economic efficiency increases. The optimal contingent pricing structure depends on the buyer's risk attitude—a deep discount is most profitable if buyers are risk prone. A consolation reward is most profitable if buyers are risk averse. To motivate buyers to participate in a contingent pricing arrangement, the seller must provide sufficient incentives. Consequently, buyers also benefit from contingent pricing. In addition, because the buyers with the highest willingness-to-pay get the product, contingent pricing increases the efficiency of resource allocation.

Selling less information for more: garbling with benefits

The expected value of information in a standard portfolio investment problem with ex-post payment can increase when the information is garbled prior to its sale. Distorting the information helps to resolve the incentive problem decreasing the buyer's default risk and thereby increasing the seller's expected revenues.

Nonlinear Incentive Provision in Walrasian Markets: A Cournot Convergence Approach

The paper studies insurance with moral hazard in a system of contingent-claims markets. Insurance buyers are modelled as Cournot monopolists or oligopolists. The other agents condition their expectations on market prices, as in models of rational-expectations equilibrium with asymmetric information. Thereby they correctly anticipate accident probabilities corresponding to effort incentives induced by insurance buyers' net trades. When there are many agents to share the insurance buyer's risk, Cournot equilibrium outcomes are close to being second-best. In contrast, if insurance buyers are price takers, equilibria fail to exist or are bounded away from being second-best.

Evaluation of Percent-within-limits Construction Specification Parameters

Various state agencies, including the Florida Department of Transportation are rapidly moving towards a more practical percent-within-limit (PWL) specification. The current specification is based on unknown standard deviation because the range of variability is high and difficult to estimate. The parameters of PWL specifications, the acceptable quality level (AQL) and the rejectable quality level (RQL), which are selected based on engineering judgment, could lead to buyer and seller risk level greater than the values recommended by American Association of State Highway Transportation Officials (AASHTO). The purpose of this paper is to provide guidelines to determine AQL, RQL and appropriate sampling frequency using operation characteristic (OC) curves based on known standard deviation to achieve the recommended risk levels. This was demonstrated by selecting two parameters (a) asphalt content and (b) the percent passing 2.36 mm sieve, of ten Superpave mixtures. The study showed that an excessive sampling frequency of ten per lot was required to achieve the AASHTO recommended buyer's risk of 5%. In addition, a framework was developed to evaluate the sampling plan and its associated the risk level based on the construction and material variability observed in the field.

Risk hedging via options contracts for physical delivery

We develop an analytical framework for the valuation of options contracts for physical delivery that enable risk-sharing between the trading partners. The spot market price risk, the buyer's demand risk and the seller's marginal cost risk, which are key to many industrial settings such as the chemical industry, are explicitly incorporated. Analytical expressions for the buyer's optimal reservation quantity and the seller's optimal tariff are derived and related to the risk management needs in the industry. The ensuing discussion shows how contingency contracts for physical delivery can complement financial derivative instruments within a company's risk management approach.

Sampling Grain Shipments To Detect Genetically Modified Seed

Using the binomial distribution, the effect of sample size on the variability among sample test results when sampling a lot with 1.0% genetically modified (GM) or biotech seed was evaluated. The coefficient of variation, cv, among 500-seed sample test results taken from a lot with truly 1.0% was computed to be 44.5%. Increasing sample size to 1000 seeds reduced the cv among sample test results to 31.5%. The effects of sample size and accept/reject limits on the buyer's risk (bad lots accepted) and the seller's risk (good lots rejected) was also evaluated assuming a tolerance of 1.0% GM seed. Increasing sample size decreases both the buyer's and seller's risks at the same time. Using an accept/reject limit below the regulatory tolerance decreases the buyer's risk, but increases the seller's risk. Using an accept/reject limit above the regulatory tolerance decreases the seller's risk but increases the buyer's risk.

When to Haggle

A seller faces a buyer with unknown reservation value. We show that buyer risk aversion can make it in the seller's interest to haggle. That is, the seller should make an initial offer and then, if it is rejected, make a second offer with some probability strictly less than one. This is true regardless of whether the seller haggles over price, quality, or price and quality simultaneously. The results are extended to contexts with multiple types of buyers and multiple dimensions for haggling.

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

Distribution of aflatoxin in pistachios. 6. Seller's and buyer's risk.

The seller's risk-the probability of a set of samples exceeding an agreed upon aflatoxin level when the lot mean does not-and the buyer's risk-the probability of a lot exceeding this level when a set of samples do not-have been computed using a parametrized experimental aflatoxin distribution and Monte Carlo simulation. The calculations are exemplified using the proposed EC standards (three 10 kg samples, 4 ng/g of total aflatoxin, basis kernels only) as well as for samples up to 250 kg and for varied lot aflatoxin levels. It is found that within this sample size range the seller's risk is as high as 42% at 10 kg and increases with increasing sample size to 80% at 250 kg. Only by reducing lot levels to 0.2 ng/g of total aflatoxin, basis kernels, can the risk be brought down to 2.5%, independent of sample size. The buyer's risk is as high as 58% at 10 kg but falls to 11% at 250 kg samples. The implications for both seller and buyer strategies are discussed.

Technology Transfer, Licensing Contracts, and Incentives for Further Innovation

AbstractTechnology licensing is common in agricultural and natural resource sectors. An important characteristic of technology licenses is that they provide incentives for further innovation on the part of the buyer. This paper develops a risk‐sharing model to analyze how risk preferences and expectations about further innovation possibilities alter technology payments and the incentives for complementary local innovation. Higher buyer risk aversion, which is associated with lower fixed payments, reduces the technology buyer's level of innovation. Sellers are generally better off when innovation is anticipated, but buyers are generally better off when innovation is unanticipated, although less innovation may be realized.

Evaluation of front loading in auctions for wholesale power

Bidders in auctions for long-term wholesale power contracts may offer prices that exceed value in the short run, even if they are attractive in the long run. Such prices are called ‘front-loaded’. Some multi-attribute bid evaluation schemes penalize front-loading bids. The rationale for penalties is the buyer's risk that long-run benefits will not materialize due to premature termination of the contract. We propose a framework to analyse the economics of front-loaded bids. Our method exploits the intuition that front-loading is a loan from buyer to seller. We separate this loan from the bidder's price stream. The default risk of these loans is embodied in an interest rate greater than the utility's normal discount rate. Several proposed bid evaluation systems are analysed from this perspective.

THE EFFICACY OF STATE MANDATED MINIMUM QUALITY CERTIFICATION: THE CASE OF USED VEHICLES

This paper investigates whether the quality certification required by certain state used vehicle disclosure laws has been effective. Metzger concluded from a theoretical investigation of non‐market responses to the lemons problem, that such laws may or may not be effective. We have been unable to find evidence that the currently mandated disclosure requirements in Wisconsin (known defects provision) and Iowa (safety certification) are effective in increasing the number of good quality vehicles traded in those used markets. These disclosure requirements do not seem to decrease a prospective buyer's risk of purchasing a lemon.