Private electronic market
Encyclopedia
A private electronic market (PEM) uses the Internet
to connect a limited number or pre-qualified buyers or sellers in one market
. PEMs are a hybrid between perfectly open markets (e.g. exchanges where there is no pre-existing relationship between buyer and seller - similar to eBay
) and closed contract negotiations (such as a sealed bid tender, where there is no visibility between competitors and hence no response to competition
). The core idea of PEMs is to create competition among buyers/sellers while allowing buyers/sellers to adjust all those aspects of the deal that are typically only dealt with in a negotiation.
This creates a problem of "comparing apples and oranges": bids may be quite different in many dimensions and therefore cannot easily be compared. Apart from the dimension of price these could include pre-negotiated discounts (e.g. for loyalty), specific qualities, combinations of goods and services with conditional pricing, freight differentials, contract fulfillment timing, payment terms, or deliberate constraints such as market share limits.
(VicForests) regularly invites a number of saw mills to bid for native timber supply (forestauctions.com). The VicForests Private Electronic Market allows saw mills to specify exactly the volume they require, the quality, species, payment terms etc. Saw mills can also create conditional bids such as "if I win x and y I am willing to pay more". Further, market participants are factored e.g. based on transport costs. In effect, a saw mill that is further away will have to bid more than one that is close by. Similarly, a bid for one particular lot may be the highest but a bundle created by another participant may still win based on higher total revenue. Participants receive real-time feedback on where they stand with their current bids and are able to respond.
Compared to the traditional sealed bid tender approach, VicForests' PEM resulted in a substantial revenue increase.
or in simple terms: a win-win for the seller (who maximizes revenue) and buyers (acquiring exactly what is of highest value to them). PEMs are based on game theory
and combinatorial auction
theory.
Internet
The Internet is a global system of interconnected computer networks that use the standard Internet protocol suite to serve billions of users worldwide...
to connect a limited number or pre-qualified buyers or sellers in one market
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
. PEMs are a hybrid between perfectly open markets (e.g. exchanges where there is no pre-existing relationship between buyer and seller - similar to eBay
EBay
eBay Inc. is an American internet consumer-to-consumer corporation that manages eBay.com, an online auction and shopping website in which people and businesses buy and sell a broad variety of goods and services worldwide...
) and closed contract negotiations (such as a sealed bid tender, where there is no visibility between competitors and hence no response to competition
Competition
Competition is a contest between individuals, groups, animals, etc. for territory, a niche, or a location of resources. It arises whenever two and only two strive for a goal which cannot be shared. Competition occurs naturally between living organisms which co-exist in the same environment. For...
). The core idea of PEMs is to create competition among buyers/sellers while allowing buyers/sellers to adjust all those aspects of the deal that are typically only dealt with in a negotiation.
This creates a problem of "comparing apples and oranges": bids may be quite different in many dimensions and therefore cannot easily be compared. Apart from the dimension of price these could include pre-negotiated discounts (e.g. for loyalty), specific qualities, combinations of goods and services with conditional pricing, freight differentials, contract fulfillment timing, payment terms, or deliberate constraints such as market share limits.
Practical example
A Government owned agency in AustraliaAustralia
Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...
(VicForests) regularly invites a number of saw mills to bid for native timber supply (forestauctions.com). The VicForests Private Electronic Market allows saw mills to specify exactly the volume they require, the quality, species, payment terms etc. Saw mills can also create conditional bids such as "if I win x and y I am willing to pay more". Further, market participants are factored e.g. based on transport costs. In effect, a saw mill that is further away will have to bid more than one that is close by. Similarly, a bid for one particular lot may be the highest but a bundle created by another participant may still win based on higher total revenue. Participants receive real-time feedback on where they stand with their current bids and are able to respond.
Compared to the traditional sealed bid tender approach, VicForests' PEM resulted in a substantial revenue increase.
Relevance
The overall effect of a well designed Private Electronic Market is what is described as allocative efficiencyAllocative efficiency
Allocative efficiency is a theoretical measure of the benefit or utility derived from a proposed or actual selection in the allocation or allotment of resources....
or in simple terms: a win-win for the seller (who maximizes revenue) and buyers (acquiring exactly what is of highest value to them). PEMs are based on game theory
Game theory
Game theory is a mathematical method for analyzing calculated circumstances, such as in games, where a person’s success is based upon the choices of others...
and combinatorial auction
Combinatorial auction
A combinatorial auction is a type of smart market in which participants can place bids on combinations of discrete items, or “packages,” rather than just individual items or continuous quantities....
theory.