Does Procurement eAuction Design Matter? (part 6)

Nearly there now: I’ve summarised the recent history of auction types and given examples of how differnet auction types achieve better results in different supply markets. And so far I’ve provided 3 tips that I’ve seen help TradingPartners (and hopefully you) run better reverse auctions.

This tip is all about structuring your reverse auction to encourage maximum competition. My presentation used some pretty basic clip art and animations to get the point across – that won’t really work as an image attached to a blog post. But I can give you the story equally well.

I’m not going to talk about reverse auctions for this tip. I’m going to talk about sales (forward) auctions, specifically the sales of 3G license spectrum in Europe in 2000 – 2001. Auctions are now a commonplace method of auctioning the rights to part of the radio spectrum but back in 2000, in Europe, they were quite a new idea. I’m going to compare 2 of the European auctions: Great Britain (a resouding success) and Switzerland (an umitigated failure).

Great Britain

There were 4 main existing mobile phone providers in the market place. The government had 4 licenses they could sell for this new type of spectrum. Each of the existing phone providers wanted a piece of the action. and the market knew this. Potential new entrants into the market were put off attempting to take part. How could a new company compete with one of the established behemoths? Any new company could expect to spend a fortune preparing their bid, only to be comprehensively outbid by the big guns.

There were various solutions touted around. But in the end the government was able to change the specifications and offer a 5th license. 5 licenses, 4 key players: At least one new entrant would win a license. All of a sudden the marketplace was abuzz with enthusiasm and 9 new entrants were attracted into the auction. 5 bands, 13 bidders: the competition was intense and the result was a tremendous success.

Switzerland

On the other hand, Switzerland’s auction was a mess. They started the process with 4 licenses amongst 9 potential bidders. But there was a quirk in their auction rules: joint bidding arrangements amongst companies were allowed. Sure enough, with only a few days to go before the auction the 9 bidders had formed joint bidding arrangements such that only 4 distinct bidding entities were left. The Swiss government tried to cancel the auction. They were sued. They lost. They had to award the licenses at the reserve price (which, to add insult to injury, had been set very low). Ouch.

The tip here applies as much to reverse auctions as it does to forward auctions: Make your auction as interesting as possible for as many bidders as possible to enter. But be careful of your rules as bidders will try and take advantage of the rules if they can.

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