Creating the right value proposition depends on the auction or trading model you choose
While auctions have been taking place for hundreds of years, they are actually quite complicated. Most people think of eBay when it comes to practically implementing auctions. However, there are several different types of auction models, and lots of different ways of setting them up.
An auction is really a conversation around price.
If you want to create the right value proposition, what you want to do is enable that conversation to happen as smoothly and succinctly as possible, to create the right outcome. Let’s talk through some of the options when it comes to choosing the right auction model for your business:
The most well-known: English Forward auction
The most well-known and common application of the auction process is called an English Forward auction, whereby buyers compete for goods or services by bidding an incremental price. Bidding can be open (public) or closed (anonymous) and the goods or services sell to the highest bidder at the conclusion of the auction if the bid is greater than the reserve price set.
The reserve price is the highest price a buyer is willing to pay, or the lowest price a seller is willing to accept. This price is decided by the auctioneer (or marketplace operator), and agreed by the seller, before the start of the auction.
We’ve deployed this model on to Christie’s online auction platform, and suits those in the fine arts industry well due to the typical high demand and high value of items placed on auction.
What about anonymous bidding?
In a sealed bid application, buyers place an anonymous bid, or series of bids, for different quantities of inventory they wish to purchase, at the price they are willing to pay for that quantity. Winners are determined algorithmically to ensure the fairest outcomes for buyers and sellers at auction conclusion, depending on rules that the marketplace operator sets for the auction.
In this scenario, bidders are not aware of the bids of other participants, and the highest bidder pays the price that was submitted for each quantity of product.
This model, whilst not the most transparent, allows sellers to possibly get more than they were expecting for a particular product, as participants bid at the price they are willing to pay rather than basing bids off of what other participants might be willing to spend.
We’ve deployed this model within the automotive industry for CarNext, and sealed bid functionality has positively impacted their business.
How else can value gain be maximised – for both buyers and sellers?
The most complex auction model we offer, a tender auction, also referred to as a capacity auction, allows both the sale price and the allocation of quantity between buyers to be determined by a resolution algorithm. Resolution algorithms can be customised depending on what makes sense for a client’s business, given supply and demand implications which are specific to each market.
The design of this model was guided by three key objectives:
1) Maximise total value gain across buyers and sellers.
2) Simplify the decision processes faced by buyers.
3) Enable buyers and sellers to reflect their degree of flexibility over the quantities they want allocated.
This model has been deployed in the commodities industry for Global Dairy Trade, allowing traders to clear the market most quickly due to the perishable nature of dairy products. However, the model is applicable to many industries whereby satisfying the market and ensuring no latent demand is left over after an auction, is a priority.
Trade is at the heart of our marketplaces
At NovaFori, we like to say trade is at the heart of our marketplaces, but what exactly do we mean by this? We help you select the right auction and trading model(s) to give you confidence that your marketplace will always provide fair prices to all participants, with minimum friction - this is our definition of an optimal marketplace.
Reach out to us to learn more.
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