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Toward Optimal Auction Rules for eB2B eXchanges

Toward Optimal Auction Rules for eB2B eXchanges. John W. Bagby Center for Supply Chain Management The Pennsylvania State University. Models of eCommerce Based on Traditional Contract Principles. 1. Informational Model Mutual Assent Model Consideration Model Performance Model .

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Toward Optimal Auction Rules for eB2B eXchanges

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  1. Toward Optimal Auction Rules for eB2B eXchanges John W. Bagby Center for Supply Chain Management The Pennsylvania State University

  2. Models of eCommerce Based on Traditional Contract Principles 1. Informational Model • Mutual Assent Model • Consideration Model • Performance Model

  3. Informational Model • Identifying Buyers & Sellers • Connecting Buyers w/ Sellers • Identifying & Soliciting 3d Parties • Communicating/Revising Specifications • Communicating/Revising (K) Terms • Collect/Distribute Counter-Party Data • Customer dossiers: for sale or barter • Eyeballs, banner ads, referrals, branding

  4. Mutual Assent Model • Agents’ authority to bargain or obligate • Negotiations, inquiries regarding terms • Offers, acceptances, counter-offers, rejections, modifications, repudiation • POs, confirmations, invoices, battle of the forms, std./collateral terms • Trading partner agreements • S/F - memo, P/E - integration, notices, traditional signatures/initials, clickwraps • UETA, e-Recs, DigSig, e-Sigs, authentication

  5. Consideration Model • Traditionally blocked enforcement unless all parties bound to new obligations • Peppercorn theory • New legally enforceable duty to do or refrain from doing something not previously obligated • Duty NOT contingent on wish will or desire • B2B: scriveners careful, UCC exceptions • B2C: site access contingent revealing data • B2G: Govt could repudiate (e.g., TX, GA)

  6. Performance Model • Currently Intangibles only: • Data, artistic expression, advice, reports, software, images, audio, video, notices • Maybe someday Smell-O-Vision or Trekies’ Transporter Room • e-Doc custody, transmit, present, endorse • Book entry of e-records • e-Pmts • UCITA: software, data

  7. e-B2B Evolution • 1st Phase: Traditional EDI • Dedicated secure communications • Trading partner agreements • 2d Phase: 3d Party eXchanges • Multiple buyers/sellers • Vendor resistance to price competition • 3d Phase: Industry Procure Consortia • Oligopsonists force vendor participation

  8. Impetus-Centric Model: a Refinement • Seller-Centric • Buyer-Centric • e-Market-Centric

  9. Buyer-Centric eXchange Single Buyer Multiple Vendors

  10. Monopsony: buyer’s market power Captive suppliers reluctance Buyer likely owns &/or controls eXchange Qualification of sellers to maintain quality, confidentiality & security Buyer imposes uniformity in specifications & sale terms Buyer-Centric eXchange Characteristics

  11. Seller-Centric eXchange Multiple Buyers Single Vendor

  12. Seller-Centric eXchange Characteristics • Monopoly Power • Captive Buyers • Seller likely owns &/or controls eXchange • Qualification of buyers to maintain creditworthiness, confidentiality & security • Seller imposes uniformity in specifications & sale terms

  13. e-Market-Centric eXchange Multiple Buyers Multiple Vendors Independent eXchange Market

  14. Opportunity for Mkt’s Independence e-Trade show Considerable visibility possible: Parties identity & capabilities Price, specifications, sale terms Appears closest to perfect competition Infinite buyers & sellers, perfect information, standardized products Terms visibility encourages signaling e-Market-Centric eXchange Characteristics

  15. Barriers to Entry: Participation, recruitment, membership Replicable infrastructure Software, hardware, connectivity IProtectable market mechanisms Independent if high transactions fees, unique/complex MoDB Dependant if no/low transactions fees, generic/simple MoDB Spawning Independent eB2B eXchanges

  16. B2C e-Auctions 1999 over 10,000 complaints to FTC Misrepresentation of goods eBay uses reputation bulletin boards for parties Whats next? on-line credit bureau, background check B2B eXchange Risks when buyers unknown to vendors How about a Dunn & Bradstreet plug-in? Counter-Party Reliability

  17. Resellers will defend turf & margins Resort to Political & Legal Means Franchisee protection laws Preempts vendor B2C skirting intermediaries Reluctance to participate in eB2B eXchanges Potential for resentment & retribution Evaluate reseller value added & powers Channel Squeal

  18. NASDAQ is THE Preeminent Model Unequaled transaction volume Instant visibility of price, Q, timing Liquidity, standardization, mkt. making Clearance, delivery, pmt mechanisms Distinguish IPO from secondary mkt. Dealers vs. brokers, underwriting risk, fungible standard “goods,” SRO Precedents from Existing eXchange Experiences

  19. eB2B eXchange: an Auction?!? • Implications of true Auction • Standardized or identified goods • Standard terms of trade, only price varies • Never’ll be more than a spot market • eB2B eXchanges envision: • Customized goods & quantities • Joint design of product specifications • Iterative, confidential communications • RFP’s, RFQ’s, expressions of interest • Distinctions limit existing model’s utility

  20. Adam Smith’s Famous Quote: Seldom do competitors meet for merriment or otherwise than their conversation will turn to a contrivance against the public Close scrutiny given horizontal joint ventures & trade association activities Convenient collusion/price fixing conduit Exclusionary: essential facility Division of markets, group boycotts, standards setting all suspect eB2B eXchanges Antitrust Aspects

  21. Typified by allegations in SABRE case eXchange communicates price tests Conscious parallelism price fixing method Tacit price fixing agreement, mimic price leader Famous hardwood industry pricing policing Paper publication of all transactions identifying buyer, seller, grade, quantity, date & price Jawboning against discounts @ trade assn. mtg OPEC’s formal policing & data reliability Price Signaling & Coordination

  22. Business Model & Method Patents • Business Methods ARE Patentable since State St. Bank hub & spoke mutual fund • Anything [Human-made] Under the Sun is Patentable if it Produces a . . . • Useful, Concrete, Tangible Result (UCTR) • Business Method Exception was Illusory • MoDB Patents: 21st Century Gold Rush • Consider Impact of Priceline’s famous Reverse Auction on eB2B eXchanges

  23. Defining Business Methods • Financial, accounting, manufacturing, logistics, etc. • Need Business Modeling Conventions • What components & orchestration to UCTR • “Methods” Are Business Methods (‘99 Act) • Business Plans for VC Review • Trade Secrets • Business Models • eB2B eXchanges may Involve Innovative Business Models & MAY be Patentable • Potential fee source for eXchange

  24. Eiplogue • eB2B eXchange Architecture is THE Fundamental Difficulty at the Outset • Two Major Concerns Balanced: • Capture of benefits by initial participants • Avoidance of repercussions from design flaws • Failure of Market Acceptance from operational difficulties or perceived unfairness • Legal risks: contracting, IP, antitrust

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