The set-up of a reverse auction platform

Faculty of Economics and Business

The set-up of a reverse auction platform

Bas Jasperse

10433392

Bachelor Thesis

2

February 2015

Statement of Originality

This document is written by Bas Jasperse who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

Table of contents 1. Introduction……….. 1 2. Literature review……….. 2 2.1 Auction intermediaries………. 3 2.2 Revenue models..………. 6 2.4 Platform marketing……..……… 9 3. Survey……….. 12 3.1 Set-up……… 12 3.2 Results……..……… 13 4. Conclusions... 14

4.1 Summary and conclusion………... 14

4.2 Limitations and suggestions future research……..………… 15

References……..………... 17

1. Introduction

For the past fifteen years online reverse auctions have become increasingly used as a procurement tool to reduce procurement costs of many products (Emiliani, 2002). Since 2000 several companies specialized in online procurement auctions have entered the market. These companies were also called “market makers” (Emiliani, 2002). These market makers assist buyers in the buying process and facilitate communication between supply and demand in order to complete transactions. Therefore these market maker companies can also be seen as auction intermediaries (Schoenherr & Mabert, 2002). The auction intermediary creates a platform for both buyers and suppliers with a reverse auction as price mechanism. The auction

intermediary establishes this auction platform with the purpose of generating revenue. Therefore the following research question will be central in this thesis:

How to initiate a successful reverse auction platform?

In order to formulate a conclusion about this, two sub-questions will be answered in this thesis:

• What is an attractive revenue model for an auction intermediary?

• Under what circumstances is it attractive for a buyer to participate in a reverse auction platform, and how can this be successful?

In order to formulate conclusions for these sub-questions and eventually the main question, a literature review and a survey will be used.

Online procurement auctions and auctions in general have been a popular research area since the rise of auction intermediaries around the year 2000. In previous academic research there has been a strong focus on business-to-consumer and consumer-to-consumer auctions. According to Pinker, Seidmann and Vakrat (2003): “There is a need for the academic community to forge stronger ties with the leaders in the B2B online auction market.” (p. 1481). Besides, there are few empirical studies with a focus on the actual realized savings of online procurement auctions. Mithas and Jones (2005) present in their paper the effects of auction parameters on the actual realized savings in the automotive industry. Furthermore, Bajari, McMillan

and Tadelis (2008) focus in their empirical research on auctions versus negotiations in procurement in private sector building contracts. In addition, there are several studies on the conditions for the optimal design of online auctions. These conditions include: product characteristics, number of bidders and buyer supplier relationships (Jap, 2002). One important element of the auction design for the auction intermediary is the payment structure in their business model. According to past academic research there is a need for guidelines for auction intermediaries for the set-up of their business model (Pinker, Seidmann & Makrat, 2003). Furthermore, according to research of Schoenherr and Mabert (2002), the future role of auction intermediaries and their business model will change. This is due to the maturity of the market for auction intermediaries. Therefore, from this academic point of view it is relevant to conduct a new research about the optimal method to set up an auction platform for auction intermediaries.

In this thesis, all the above-mentioned studies will be combined for a literature review on auction intermediaries and the set-up of their auction platform. This thesis will give a clear view on the existing amount of literature and subsequently combine past academic research results with the purpose of defining guidelines for auction intermediaries on how they should set up a reverse auction platform. Besides the literature review, a survey will be used for procurement departments of several industries in order to achieve a better understanding of the real business experiences.

The set-up of the remainder of this thesis is as follows. This thesis will

continue with chapter 2 where the existing literature will be reviewed, with a focus on the auction intermediary, the corresponding revenue models and the platform

marketing. Thereafter, in chapter 3, the set-up of the survey will be presented including the results. Finally, in chapter 4 the conclusions, the limitations and suggestions for future research will be presented.

2. Literature review

This chapter will give an overview of the existing relevant literature on auction

intermediaries with the purpose of defining a method on how the auction intermediary can set up a reverse auction platform. First in section 2.1, the added value and the existence of auction intermediaries will be described. The auction intermediary can offer full service or low service, which will be discussed during this section.

Depending on the type of the auction intermediary, the process of an auction will be described. Then in section 2.2, the platform marketing will be discussed. First there is a distinction between bilateral negotiations and auctions. Then three conditions for the optimal design will be discussed, which include the product characteristics, buyer-supplier relationship and number of bidders. These conditions are related to the distinction between auctions and bilateral negotiations and this combination will give a clear insight for the most appropriate parties that should be attracted to the auction platform. This insight will refer to the sub question of the circumstances under what it is attractive for the buyer to participate in an auction platform.

2.1 Auction intermediaries

In the past few years, intermediaries and their added value have been amply discussed in past academic literature. One of the most important functions of an intermediary is to connect demand and supply in the market (Pinker, Seidmann & Makrat, 2003). This is in line with the definition of an intermediary according to Schoenherr and Mabert (2002): “An intermediary can be defined as an agent that helps buyers and sellers meet and transact”. This can also be seen as a matching role of the

intermediary. In order to find new business partners in a specific industry, the buyer and the seller need to have sufficient knowledge about the market where they operate. An intermediary is able to be in contact with all the buyers and sellers in the market and have the ability to match them. Therefore, this matching role is considered as an added value of the intermediary (Janssen & Sol, 2000). Additionally, the intermediary establishes trust within the market. This is because the intermediary has a high

incentive to ensure the transactions are completed. Furthermore, the intermediary can offer a facilitating service where the intermediary facilitates information to the buyers and sellers (Janssen & Sol, 2000).

These roles of an intermediary can be translated in the specific roles of an online auction intermediary. Schoenherr and Mabert (2002) distinguish between full service providers and low service providers.

The full service auction intermediary offers the reverse auction software, which can be seen as the auction platform where buyers and suppliers meet. Further, the full service auction intermediary offers high intermediating services as described in the beginning of this section. These full service auction intermediaries can

new potential suppliers for the buyer and provide infrastructure for the auctions. Further they offer services as consultation, market analysis and bid analysis (Emiliani, 2000). They also add value by creating a well-defined request for quote in association with the buyer (RFQ). This RFQ is a detailed specification form with the specific products or services that are going to be auctioned. This includes the contract duration and contract terms and a list with the potential suppliers and all the other specific buyer requirements (Emiliani, 2000). At this stage of the process it is possible for the buyer to make use of the available services of the full service auction intermediary. This refers to the service of introducing new potential suppliers to the buyer

(Schoenherr & Mabert, 2002). The buyer will review this potential list from the auction intermediary and will select only suppliers who are capable enough to meet the requirements of the buyers’ specific needs. After this selection procedure the buyer approves the list and sends it to the auction intermediary. When the auction intermediary receives the list with the appropriate suppliers, the auction intermediary will send the invitations for the auction to the suppliers to participate in the auction at a specific date and time. At this stage of the process, the suppliers can also be seen as the bidders, because the suppliers will bid on the buyers’ specific needs (Emiliani, 2002).

After this beginning stage, the auction design needs to be set with the appropriate auction parameters. Both the buyer and the full service auction

intermediary set these auction parameters and discuss the definition of the parameters. The auction parameters includes the reserve price, auction duration, auction starting time, bid decrement, sealed bid versus open bid and information revelation during the auction (Mithas & Jones, 2007). According to Mithas and Jones (2007) the full service auction intermediary chooses between two information revelation policies: rank format or starting gate format. In rank format the suppliers see only their rank compared to the other suppliers and they only see their own bid and nothing more. Within the starting gate format, the supplier can only see the last bid when the supplier actually starts bidding. This is to prevent suppliers to only watch to their competitors offers and wait with their own bids. This information revelation is not the same as the open or sealed bid auction parameter. The information revelation

principle is focused on the information during the auction and the open or sealed bid auction parameter is determined before the auction starts. Within sealed bid auctions

only the buyer and the concerning supplier can see the details of their bid. In the case of an open bid auction all the suppliers can view the bids at the same time (Jap, 2002).

Finally, the buyer decides who wins the auction. This needs to be the supplier with the lowest bid. This implies that this supplier signs a contract with the buyer for the specific product or service but the buyer may have particular preferences between different preferred suppliers. Therefore, the lowest bid in the auction does not have the guarantee to win if the buyer has different preferences (Pinker, Seidmann & Makrat, 2003).

Besides these FSPs, there are LSPs, which represent intermediaries who only provide the appropriate software for the auction platform. The process of the auction is completely initiated by the buyer and the supplier without intervention of the auction intermediary. This minimal intermediation is focussed on companies that already have the knowledge about their market and the specific use of auctions. These companies want to have more control over their buying process and save fees and commissions (Schoenherr & Mabert, 2002). This corresponds with the paper of Schoenherr and Mabert (2002), where they discuss the changing role of an auction intermediary because of the maturity of the market. When companies, who make use of the value-added services of an online auction intermediary, gain more experience on online auctions and obtain more knowledge about their markets, they can choose to eliminate the intermediary. They save costs and are more interested in the low service auction intermediaries.

The main difference between the full service and low service auction intermediary is the value-added service provided by the auction intermediary.

Therefore, it must be clear that the auction platform is in both types the same. But the different services of both types of auction intermediaries attract different types of buyers to the platform. This is due to the maturity of the market (Schoenherr &

Mabert, 2002). The full service auction intermediary will attract parties with not much experience in their market, whereas the low service auction intermediary will attract more experienced parties.

The difference in the types of auction intermediaries entails a difference in the revenue model of the both types of auction intermediaries. In the next section the most appropriate revenue models for auction intermediaries according to their business model will be discussed.

2.2 Revenue models

The auction intermediary must choose an appropriate revenue model in accordance with their offered services. The auction intermediary typically asks a percentage of the transaction value and a possible listing fee for the use of the appropriate software (Pinker, Seidmann & Makrat, 2003). I will argue that the optimal revenue model differs between full- and low service intermediaries as described in the previous section. They offer both different services and should therefore be treated separately.

In order to find the optimal revenue model, the value of the offered services of the full service auction intermediary can be determined by the number of participants. The value of their services will depend on the participants because of positive

network externalities (Yoo, Choudhary & Mukhupadhyay, 2002). These positive network externalities will refer to the value for the buyer and the supplier in the auction format. When the auction intermediary can introduce the buyer to more suppliers, the value for the buyer will be higher than the situation with fewer suppliers. Yoo, Choudhary and Mukhupadhyay (2002) showed in their research on the revenue maximization model for auction intermediaries, that the price of the offered services by the auction intermediary would be higher when there are positive network externalities. On the other side, when there are no suppliers available for introduction to the buyer, the interest in the auction platform would be low. Because of this low interest in the auction platform, the generated revenue for the auction intermediary will be low. Therefore the low interest in the auction platform is negative for the auction intermediary. This is due to the negative network

externalities. Therefore the designed auction platform can be seen as a two-sided market with both positive and negative network externalities. In addition, Yoo, Choudhary and Mukhupadhyay (2002) made the assumption that the intermediary is completely independent. This is in line with the assumptions made in this thesis. Their research was focused on empirical evidence for the best pricing strategy for

intermediaries in combination with network externalities. Based on their results they conclude that because of the existence of two sided network externalities, the number of participants and the prices have a significant effect on each other. If one party, the buyer or the supplier, have more benefits from the positive network externalities compared to the other party, this party should pay a higher price (Yoo, Choudhary & Mukhupadhyay, 2002).

These network externalities have significant influence on the pricing strategy for the offered services of the auction intermediary. In order to translate these

implications to the reverse auction concept, it must be clear which party obtains the most positive network externalities. Within the online reverse auction concept, there is a stronger focus on the specific needs from the buyer. The buyer will approach the auction intermediary in order to buy a specific product for a lower price. At this point there are two possibilities for the buyer regarding the use of the value-added services of the auction intermediary. Therefore there is a distinction between full service and low service auction intermediaries.

The services of the full service auction intermediary are especially designed for the buyers in the market. The auction intermediary will introduce the buyer to new potential suppliers. When the auction intermediary does not introduce enough

potential suppliers to the buyer, the buyers’ willingness to pay is lower. Therefore the buyer obtains more positive network externalities in comparison with the supplier. This implies that the auction intermediary should charge the buyer a higher price for the offered services. In the case of a low service auction intermediary both the buyer and the suppliers face the same positive and negative network externalities. The offered product in a form of a reverse auction platform without any services can be seen as a marketplace where buyers and suppliers can find each other. In this marketplace the buyer and the seller are equally benefited from more participants. Therefore, both parties obtain the same network externalities. This implies that the auction intermediary should charge both parties the same price for the auction platform.

These findings for the charged prices by the auction intermediary regarding the network externalities can be complemented by a case study of FreeMarkets. This company, that started their auction platform 15 years ago, can be seen as a valuable example regarding their revenue model. This company was acquired by Ariba in 2004 and subsequently acquired by SAP in 2012. The revenue model of FreeMarkets existed of a fixed monthly fee for the use for their offered services, performance incentive payments based on volume and sales commissions.

FreeMarkets started their business as full service auction intermediary. During the years they decided to also offer the auction platform as software package without their services. Therefore they can be seen as both full service and low service auction intermediaries. As full service auction intermediary, they generate all their revenue by

the agreements with only the buyer (Anderson & Forhlich, 2001). Before FreeMarkets decided to charge only the buyer, they experimented with a sales commission fee for both the buyer and supplier. The suppliers who used the online auction platform were strongly against this payment structure of FreeMarkets. As a consequence

FreeMarkets decided to discontinue with this type of revenue model and charge only the buyer (Anderson & Frohlich, 2001). This corresponds partly with the statement earlier in this thesis that the buyer should be charged a higher price within full service auction intermediaries because of the obtained positive network externalities. This implies that in the case of the reverse auction concept, the full service auction intermediary should only charge the buyer a price.

Besides the offered services of FreeMarkets, they offered also only the auction platform as software package. At this point, FreeMarkets can be seen as a low service auction intermediary. For the use of this auction platform they charge both the buyer and supplier a fixed monthly fee in form of a license (Anderson & Frohlich, 2001). This corresponds completely with the statement made earlier in this thesis that the buyer and supplier should be charged the same price because both parties obtain equal network externalities.

At this point, it is clear for the auction intermediary which parties should be charged a price in their revenue model. This can be complemented by the results of Matros and Zapechelnyuk (2008) to make clear in what form these payments should be made. According to Matros and Zapechelnyuk (2008) the auction intermediary may charge a listing fee and a closing fee. With the listing fee they refer to the upfront payment before the actual start of the auction. Further, with the closing fee they refer to a percentage of the transaction price of the auctioned products. Using empirical research on optimal pricing of the fees for an auction intermediary, the find that the optimal listing fee is zero. Therefore, they conclude that the auction intermediary should only ask a closing fee. By doing so, the intermediary aligns the interest of the buyer and seller (Matros & Zapechelnyuk, 2008).

Although their research is focused on forward auctions, their results can be translated into the reverse auction concept for both the full service and low service auction intermediary. At the early stage of the establishment of an auction platform, it is better to require no listing fee in order to bring as many participants as possible to the auction platform. When the listing fee is zero, inexperienced companies have

Ultimately when the auction platform is established and there are enough participants, the existence of the listing fee must be revised upwards. This implies that for full service auction intermediaries the listing fee should be zero and the closing fee should be in form of a percentage of the transaction value as a sales commission. This

corresponds partly with the results of the FreeMarkets case study (2001), where the buyer was charged a listing fee in combination with a sales commission. The low service auction intermediary is in the view of the listing fee a special case. Matros and Zapechelnyuk (2008) conclude that the listing fee should be zero, but the listing fee for the low service auction intermediary should actually exist. This listing fee consists of a fixed payment by both the buyer and supplier, which corresponds with the

FreeMarkets case study earlier in this chapter.

In short, the revenue model in the early stage of the full service auction intermediary should contain a sales commission for the offered services for only the buyer. The revenue model should not contain a listing fee for the use of the services by both parties. The revenue model for the low auction intermediary should contain a fixed fee for the use of the auction platform for both the buyer and the seller.

At this point it should be clear for both types of auction intermediaries how they should price their services and in what form these payments should be made. In the next section the aspects of a successful auction platform will be presented. In order to establish a successful auction platform by the auction intermediary, it should be clear under which circumstances it is attractive for the buyer to participate in an auction platform. This refers to distinction between auctions and bilateral

negotiations. This in combination with the conditions for optimal design of an auction will give an insight for the auction intermediary on the most appropriate parties that should be attracted to the auction platform.

2.2 Platform marketing

The auction platform needs to attract parties that are interested in the auction as a price mechanism. To attract these parties there is a distinction between the usage of both auctions and negotiations. An auction is: “A market institution with an explicit set of rules determining resource allocation and prices on the basis of bids from market participants” (Jap, 2002). The literature distinguishes between forward and reverse auctions that could be used for business transactions. Forward auctions are designed for a single supplier and multiple buyers. In the consumer market there are

several good examples of auction sites like eBay. In these forward auctions, one supplier describe his sellable product and subsequently multiple buyers can place a bid on this offered product (Mithas & Jones, 2007). Secondly, reverse auctions, which are designed for a single buyer and multiple suppliers (Mithas & Jones, 2007).

Another well-known price mechanism is the bilateral price negotiation. These negotiations can be defined as: “a process where two or more parties are involved and interact with each other to harmonize a conflict of interest” (Wagner and Schwab, 2003). There is a widespread use of both bilateral negotiations and auctions in order to determine the transaction price (Bajari, McMillan & Tadelis, 2008).

According to Bajari, McMillan and Tadelis (2008) on private sector building contracts, there are several different situations when negotiations are favourable above auctions and vice versa, depending on the complexity of the contract, the contractual design and the number of available bidders. In their empirical research they showed that in the case of complex contracts, auctions perform poorly compared to negotiations. Therefore, auctions are favourable when the specific contract is not complex. This corresponds with the conditions for the optimal design of an auction: product characteristics, number of bidders and the buyer-supplier relationship (Jap, 2002). The product characteristics are related to the complexity of the contract. If the products have detailed specifications, the contract is more complex than the case of commoditized products. This is in line with past academic research that showed that based products are ideally suited for online auctions (Jap, 2002). These price-based products have the characteristic that they are commoditized, and therefore the buyers and sellers can easily compare the specific products specifically in online auctions. The value of the product is easily determined in a quantitative way, which contributes to an online auction as an efficient mechanism for considering all the possibilities for the buyers and suppliers (Jap, 2002).

Further, Bajari, McMillan and Tadellis (2008) conclude that auctions are favourable when there are many available bidders. This corresponds with the findings Mithas and Jones (2007), who found in their research a positive significant relation between the buyer surplus and the number of bidders. This is in line with the competitive aspect of online auctions. Within the procurement auction it is the goal the drive down the price. In order to accomplish this, there needs to be a sufficient number of bidders within the online auction to ensure a competitive environment

needs to be competitive environment within the auction. In order to create this competitive environment, there has been recommended in several studies that the number of bidders need to be at least 2 (Wagner & Schwab, 2003). This competitive environment of auctions will contribute to a transparent price and this will eliminate the doubt about the fairness of the process, in order to prevent disagreements in the future. (Pinker, Seidmann & Makrat, 2003). The number of bidders also has a

significant relation with the buyer supplier relationship, which will be discussed in the next paragraph. When more bidders, also called suppliers, participate in an online auction, it could be seen as a credible signal to the invited suppliers. This will refer to the strict selection criteria prior to the auction (Jap, 2007).

The last condition for the optimal design of an auction is the buyer-supplier relationship. The online reverse auction mechanism is more buyers initiated and can therefore be seen as more valuable for the buyer. Specifically, the buyer needs to buy a specific product or service and has an incentive to find the best quality for the lowest possible price (Jap, 2002). Further, the online auction tool can be seen as an easy way to consider new suppliers, especially if the auction intermediary adds his valuable service of consultancy and introduce the buyer to new interesting suppliers. This will affect the buyer-supplier relationship in a negative way. The buyer is introduced to possible new suppliers and can decide to stop the relationship with the existing supplier. When the buyer makes the switch easily to a new supplier it is almost impossible to obtain a long-term relationship with the supplier (Pinker,

Seidmann & Makrat, 2003). Furthermore, buyers need to check the market and prices of other suppliers from time to time, especially when the current contract with their supplier ends. The online auction platform of the intermediary can be valuable for this type of market research (Smart & Harrison, 2003). Another important side note is the short-term view of procurement managers on online auctions. In their view, online auction are an easy way to improve financial performance. This will subsequently quickly increase shareholder value, because of the reduced purchase costs of different products. This can result in a bad corporate governance structure and managers will act on their self-interest (Emiliani, 2002).

From the existing literature I can conclude that in a buyer-supplier relationship point of view, online auctions are focused on short-term improvement and in order to contain a long-term relationship, online auctions are not efficient. Therefore, the auction intermediary should focus on the attraction of short term focused parties.

These parties should be interested in the buying of commoditized products.

Furthermore, the auction intermediary should attract at least two suppliers to create a competitive environment for both the buyer and the supplier.

These three conditions can be concluded form the existing literature. In order to test these conditions, I conducted a survey for procurement managers in several industries. The set-up and the results of this survey are presented in the next chapter.

3. Survey

In order to obtain a better understanding of real daily business in online auctions, I conducted a survey for procurement managers in the Netherlands. The details of the set-up of the survey will be presented in section 3.1. The main goal of this survey is to test the theoretical implications about the conditions for an optimal design of online auctions. These conditions for the optimal design give a clear view under which circumstances the auction platform can be successful. According to the literature review in section 2.3, the three conditions are the following. The auction intermediary should focus on the attraction short-term focused companies. This short-term vision is related to the product characteristics. These companies are interested in buying commoditized products, where they do not have the intention of sustainable long-term relationship with their supplier. The last conditions consist of the competitive

environment of the auction, where the number of bidders should be at least two. The result of the survey regarding these conditions will be discussed in section 3.2.

3.1 Set-up

The survey is conducted under procurement managers of 178 small and middle-sized companies in seven different industries. The details about these industries can be found in table A.1 in the appendix. The size of the sample is not equally divided between the industries. This is due to the quality of the conversations with the procurement managers. The most results of the survey were obtained by phone calls with the procurement departments of the specific companies. During these

conversations I asked several questions about the product characteristics, the buyer-supplier relationships and the number of bidders in an auction. These questions can be found in appendix B. In order to obtain appropriate results, I asked the procurement

managers open and closed questions regarding the conditions for optimal design of the auction.

3.2 Results

The first condition for the optimal design of an auction is the product characteristics. According to the literature review in section 2.3, the products need to be

commoditized. The results of the survey correspond almost completely with this finding. In the sample 93% of the procurement departments consider only price-based commoditized products suitable for online auctions.

The companies that are interested in buying commoditized products do not have the intention to sustain long-term relationships with their suppliers. The results of the survey correspond partly with this finding. Most companies with no online auction experience tended to the statement of not using online auctions because they have a strong long-term relationship with their existing suppliers and do not want to deteriorate this. In addition, the companies with experience on online auctions

indicated that online auctions could be useful as a tool to do market research but only for highly commoditized price-based products, which is totally in line with the implications previously presented in this thesis.

Finally, in order to create a competitive environment in the auction, there should be at least two bidders. This implication was difficult to test within the survey. This is due to the lack of auction experience within several companies. Nonetheless, 50% of the procurement managers indicated that an online auction must be

competitive and to accomplish this there must be a number of bidders of at least 3. The remaining 50% the number of bidders should be at least three in the auction. According to these procurement managers, three bidders will create more competition during the auction. This is partly corresponding with the finding of Wagner and Schwab (2003) that there needs to be at least two bidders in an auction to create a completive environment.

The implications of this survey in combination with the proposed revenue models from section 2.2 will be used to formulate a conclusion on the set-up of an auction platform for auction intermediaries. This main conclusion will be presented in the next chapter.

4. Conclusions

This chapter begins with section 4.1, which is a summary of the results and the related conclusions in this thesis. Finally, in section 4.2, the limitations and suggestions for future research will be discussed.

4.1 Summary and conclusion

The aim of this thesis has been to create clear guidelines for auction intermediaries on how they should set up a reverse auction platform successfully. This auction platform is based on the reverse auction concept. This implies that the auction platform is focused on procurement.

At the start of the auction platform, the auction intermediary needs to make a choice between the services it plans to offer. The auction intermediary can take two forms, full service and low service. The main difference between the full service and low service auction intermediaries are the offered services. The full service auction intermediary assists the buyer in the complete auction process and offers services as consultation, market analysis and bid analysis.

The type of the auction intermediary determines the appropriate revenue model. According to my literature review, the party that obtains the most positive network externalities should be charged a higher price. In the case of the full service auction intermediary, the buyer obtains the most positive network externalities. Therefore the auction intermediary should charge the buyer a higher price. In addition, the FreeMarkets case study (2001) showed that within the full service auction intermediary, only the buyer should be charged a price in form of a sales commission. Furthermore, FreeMarkets charged a listing fee for the use of their auction platform. Besides, the results of Matros and Zapechelnyuk (2008) showed that the listing fee should be zero in order to align the interest of the buyer and supplier. In the early stage of the auction platform it is important to attract as many participants as possible. Therefore, I can conclude that in the early stage of the auction platform, the revenue model for the full service auction intermediary should contain only a sales commission for the buyer, and no listing fee for the use of the auction platform. When the auction platform contains a sufficient number of participants, the listing fee should be revised upwards.

Within the low service auction intermediary, both the buyer and supplier obtain the same network externalities. This is due to the marketplace where the buyers and suppliers equally benefit from more participants. In addition, the case study of FreeMarkets (2001) showed that as low service auction intermediary, both the buyer and supplier should be charged a fixed fee in form of a license for the use of the auction platform. From this I can conclude that within the revenue model for the low service auction intermediary, both the buyer and supplier should be charged a fixed fee.

Both types of auction intermediaries attract different types of buyers to the platform. I find that full service auction intermediaries attract parties with not much experience in their market. Furthermore, low service auction intermediaries attract more experienced companies. This is due to maturity of the market. The conditions under which these companies are interested in the auction platform are the following. If the contract is not complex, auctions are favourable above bilateral negotiations. This complexity of the contract is related to the product characteristics. If the product is commoditized, the contract will be not complex. This in combination with the results of my survey shows that commoditized products are the most appropriate products for auctions. Furthermore, in a buyers-supplier relationship point of view, auctions are short-term focused. This is because of easy switch between suppliers by the buyer in the auction platform. According to the literature review there should be at least two bidders to sustain a competitive environment in the auction. In contrast, the results of the survey showed that according to 50% of the procurement managers there should be at least three bidders.

From here I can conclude the following about the circumstances under which the set-up of the auction platform will be successful. The auction intermediary should attract short-term focused companies that are interested in buying commoditized products. Furthermore, the auction intermediary should invite at least two suppliers to the auction to sustain a competitive environment for both the buyer and supplier.

4.2 Limitations and future research

The conclusion of this thesis is based on a literature review in combination with a survey for procurement managers. The proposed revenue models for both types of auction intermediaries propose some general guidelines based on past academic research. The lack of exact numbers for the revenue model can be seen as a limitation

of this thesis. Empirical research is required to substantiate my advice regarding the revenue model for auction intermediaries Therefore, a suggestion for future research would be to analyse a game theoretical model to find the optimal fee for both full service and low service auction intermediaries. This research should contain a field experiment where different auction intermediaries use multiple revenue models.

In addition, the impact of the proposed conditions for the optimal design of an online auction can be used for future empirical research. This is again focused on the lack of own empirical research in this thesis. It would be valuable to investigate the optimal number of bidders in online auctions. The set-up of this research would have a focus on the minimum number of bidders in reverse auctions. A suggestion for future research would be to analyse different number of bidders from historical auction data.

Finally, one important note on the results of the survey is the lack of auction experience for many procurement departments. Therefore, the answers of the survey are partly speculative and can vary with real auction experience. A suggestion for future research would be to conduct a survey only among procurement managers with real auction experience in more industries.

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Appendix A

A.1

Industries Size of the sample

Paper 28 Packaging 23 Machinery 16 Paint 27 Soap / Hygiene 24 Hotels 25 Hospitals 35 Total 178

Appendix B

The questions with an asterisk are used to test the conditions for the optimal design of an auction in section 3.2.

Questions:

1. What do you buy?

2. How do you buy this product?

3. Do you have experience with online reverse auctions to buy any product? 4. What are the most appropriate products for a reverse auction? *

5. Will this reverse auction price mechanism deteriorate the relationship with your supplier? *

6. How many bidders should the auction contain in order to sustain a competitive environment? *