Online Auctions for Non-Profit Fundraising: A Systematic Review

Introduction to Auctions

Dating back to Babylon in 500 BC, auctions rank among the oldest forms of price determination in markets. An auction is a negotiation protocol that entails simultaneous bidding, with prices determined by bidders and products or services allocated based on competition among potential buyers (McAfee, 2017).

Classifications of Auction Formats

There are four major classifications of auction formats based on information asymmetry and the direction of price flow: English auctions, Dutch auctions, sealed-bid first-price auctions, and Vickrey auctions (Klemperer, 2004).

English and Dutch auctions are both open auctions, meaning they are conducted orally, but they differ significantly in their price-setting features. According to Klemperer (2004), an English auction — also known as the oral ascending auction or open ascending-price auction — entails a sequential ascending price strategy in which the auctioneer sets a reserve bid price (the lowest price the auctioneer is willing to accept), while potential buyers place ascending competitive bids. Each higher bid outbids the previous one until bidders reach the maximum price they are willing to pay. As bidding prices rise, bidders gradually drop out, and the highest remaining bidder wins after multiple rounds of price iteration. Because bidders receive instant feedback on other bidders' valuations, English auctions are associated with aggressive bidding (McAfee, 2017). The dominant strategy for a bidder is therefore to bid slightly above the previous highest bid until reaching their private value for the item.

Taking its name from the Dutch Flower Auction, the Dutch auction involves an oral descending sequential price strategy. The auctioneer sets the highest asking price, while potential buyers place descending price offers. The price decreases with each subsequent bid until one bidder is willing to pay the quoted price. Although it is conducted on an open platform, a Dutch auction does not reveal sufficient information to enable bidders to make fully informed decisions. The primary distinguishing advantage of a Dutch auction is its time efficiency (Klemperer, 2004).

Both sealed-bid first-price auctions and Vickrey auctions involve the private submission and opening of bids, but they differ in the price ultimately paid by the highest bidder (Klemperer, 2004). In a sealed-bid first-price auction, each bidder independently submits a single bid without knowledge of others' bids. The item is sold to the highest bidder, which is why it is also known as the first-bid auction. McAfee (2017) notes that the confidential and documented nature of the sealed-bid format ensures accountability, making it popular among government entities and corporate organizations.

The Vickrey auction — also known as the second-price sealed-bid auction — involves bidders setting prices without knowledge of what other bidders have offered. The highest bidder wins, but pays only the price of the second-highest bid. According to Klemperer (2004), the bidder's optimal strategy is therefore determined by the bidder's private value and their perception of other bidders' valuations, making truthful bidding the dominant strategy. eBay, Google, and Bing are among the most prominent examples of Vickrey-style auctions (McAfee, 2017).

Surge Pricing and Congestion Pricing Mechanisms

Surge pricing and congestion pricing are both dynamic pricing models that employ price discrimination to set optimum prices based on the forces of demand. Surge pricing entails a temporary increase in price above the regular rate when the market is experiencing high demand. The rationale is to sustain the supply of a product or service during periods of unprecedented demand. Lower willingness to pay the surge price results in a demand decline, enabling scarce resources to be allocated among customers willing to pay a premium. A market surge also implies higher compensation for service or product providers, sustaining availability and reducing supply shortages. Surge pricing is prevalent on on-demand service platforms, particularly ride-hailing platforms such as Uber and Lyft. Uber implements a surge pricing model to ensure service reliability during high-demand periods such as severe weather events or disruptions to public transport (Klemperer, 2004; Cachon et al., 2015).

Congestion pricing is a dynamic pricing strategy structured to regulate demand by adapting prices to changing market forces. In the congestion pricing mechanism, price serves as an important signal for controlling the fair allocation of resources: high demand drives prices up, and low demand drives prices down, yielding optimal outcomes for both sellers and buyers. Congestion pricing enables the harnessing of demand forces to reduce resource wastage associated with traffic congestion. The mechanism is also widely applied in transport, electricity, and telecommunications pricing. In the transport industry, congestion pricing increases the cost of commuting during peak hours, which shifts discretionary travel — such as shopping trips — to off-peak periods or to transportation modes with less traffic. Congestion pricing has been adopted in cities such as Stockholm, London, Gothenburg, Milan, Singapore, and even smaller towns such as Durham in England. Beyond reducing peak-hour traffic, congestion pricing also raises toll revenues that can be channeled into mass transit investment, roadway maintenance, and the reduction of highway taxes such as fuel taxes paid by motorists (Teodorović et al., 2006).

Online Auctions in E-Commerce

In today's globalized economy, increasing internet access has revolutionized business mechanisms, with customer-centric e-markets emerging as a fast-growing segment of the economy (Pinker et al., 2003). The customer-centric nature of e-markets makes online auction models a particularly appropriate pricing mechanism. By addressing temporal, spatial, and geographic constraints, online auctions enhance market efficiency. Pinker et al. (2003) note that online auctions emerged in 1993, with the first internet auction websites — eBay (www.ebay.com) and OnSale (www.onsale.com) — launching in 1995. Online auction markets are characterized by varying numbers of buyers and sellers: standard auctions typically involve a single seller and multiple buyers, while reverse auctions involve multiple sellers and a single buyer. Standard auctions such as OnSale and eBay support Consumer-to-Consumer (C2C) and Business-to-Consumer (B2C) formats, while reverse auctions such as Sorcity support Business-to-Business (B2B) formats.

In e-commerce, the eBay auction serves as the prototype online auction platform, whereby bidders submit bids no lower than the reserve price and the system automatically awards the item to the highest bidder when a predetermined time limit expires (Hasker & Sickles, 2010). The eBay platform applies a proxy-bidding concept in which bidders submit maximum bids and the proxy bidding system automatically submits a bid that is a minimum increment above the second-highest maximum proxy bid, until either the bidder's maximum is reached or a subsequent bidder surpasses it. The price paid by the winner is a minimum increment above the second-highest maximum proxy bid. This system applies a second-price sealed-bid mechanism, making the dominant strategy for bidders the submission of a bid equal to their maximum willingness to pay (Ockenfels & Roth, 2002).

An Electronic Generic Auction Marketplace (e-Game) is a classical deployment of intelligent agents in commerce that entails market simulations (Fasli et al., 2014). It is a generic platform configured to support auction games, enhance efficiency, and optimize purchase and sales outcomes for both web users and software agents simultaneously. E-Game platforms support various auction types by defining parameters such as price quote calculations, auction closure, intermediate clearing, and information revelation. Fasli et al. (2014) note that e-Game platforms support multi-attribute analysis, generating a weighted score based on price, delivery convenience, and discrete values submitted by other bidders, and producing an algorithm used to determine the bid winner.

The auction of U.S. Treasury Bills (T-Bills) by the U.S. Treasury represents one of the most prominent online auction models in financial markets. T-Bill auctions are open to the general public, which may submit either competitive or non-competitive bids. Non-competitive bids are guaranteed to receive securities at the price set by competitive bids. Bidders submit tenders indicating the price and quantity of bills they intend to purchase, and the Treasury allocates T-Bills beginning with the competitive bidders quoting the highest prices, which in turn sets the price for non-competitive bidders.

References

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