Dynamic Pricing and eBay Today
Dynamic pricing is a pricing technique virtually as old as commerce, not just virtual commerce! It takes its name as a form of responsive pricing, based upon demonstrated and immediately accessible consumer demand. In dynamic pricing, prices can skyrocket or plummet with depending on the demand and consumers willingness to tolerate certain pricing levels pricing. Its oldest manifestation is of course the horse auction at the country fair, but today, "auction-based pricing" referred to as "dynamic" or "fluid" pricing, can be set in contrast to static pricing mechanisms evident in such online organizations as eBay on the World Wide Web.
Today, "nowhere perhaps is the impact of the web more evident than in the case of auctions. By now everyone has heard of eBay," the Internet company credited with pioneering the use of dynamic pricing to its maximum value in the digital age. Auctions in general use the dynamic market mechanism to solve a difficult business problem: pricing in a competitive market. Setting prices can be tricky, as product managers well know, especially...
Price the product too high and inventories mount; under price what the market is willing to pay and shortages occur and money is left on the table. Finding the right balance can take time, and indeed, one can continue to miss the mark as the market shifts and competition evolves. With an auction, there is no guesswork: the market sets the price, usually above some set minimum that can be tolerated by the seller. The most commonly used auction forms are the open-cry or English auction used on eBay, the sealed bid auction, and the Chinese auction. However, there are a number of dimensions that can be varied in an auction to yield subtle but important differences in the process and outcome. (Rappa, 2005)
On eBay, which deploys the open-cry or English auction but in digital form, users are aware of the identity and the bid of their competitors, and are thus urged to bid higher. In the sealed bid format, which is not usually practiced online, one does not know the bids of one's competitors. Although theoretically one should keep one's bidding lower in sealed…
