An auction can be defined as a process of procurement through competitive bidding that involves: (many) buyers and/or sellers, an auction method and an auctioneer. While there are a variety of types, the creation of the Internet and mass adoption of computers gave rise to electronic auctions and markets. This enabled transactions at an unprecedented scale, speed and global reach. Consequently, demand could be pooled in a manner that made it feasible for suppliers to offer niche products (long tail phenomenon).
In this post we focus on two auction types, reversed and set-price auction. These are illustrated through two examples: Upwork and TaskRabbit.
Upwork is a platform whose services include developers, designers, writers… It is mainly individuals-to-enterprise and freelancers have to submit bids of how much they would charge for a project. From a buyer’s perspective, a project is posted and the platform shortlists suitable freelancers. The firm then selects some and invites them to submit bids. Two pricing policies exist:
- Buyers can choose among three types of packages: free, Pro and Enterprise (differential pricing through versioning).
- Freelancers pay a percentage of their salary to the platform, which decreases with the total amount a specific client has paid to the freelancer.
Upwork is an example of reverse auction: sellers place bids for the prices at which they’re willing to offer their service. It addresses shortcomings of this type of auction incentivizing freelancers to deliver high quality by enabling seller ratings and having programs such as a Top Rated and Top Started programs. In addition, charging freelancers a reduced fee as a client relation progresses, encourages long-term relations and hence quality.
TaskRabbit is a two-sided market focused on services revolving around chores such as cleaning, errands… It is mainly used among private individuals, freelancers set their hourly wage and receive requests from interested buyers. From a buyer’s perspective, a job is posted and the platform assigns three suitable freelancers, of which the buyer selects one. Sellers go through a background check and interview procedure before becoming a freelancer. Then, their profile is matched to potential buyers. Revenue is generated by charging buyers 30% of the freelancer’s salary as service fee.
TaskRabbit is an example of a set-price auction, in which sellers set a price that the buyer either accepts or rejects. Although this system is similar to regular (offline) auctions, the bidding process is more streamlined, time efficient, and offers more transparency.
It should also be noted that both of our examples present information asymmetry. Buyers face uncertainty for example with regard to seller’s reliability before entering a deal (adverse selection), and they may not be able to assess the quality of, and actual time spent on, the project/task (moral hazard). This can be overcome through signaling (action by an informed party that reveals information), e.g. rating the quality of a freelancer’s work upon completion; and through screening (attempt by an uninformed party to filter information), e.g. looking at freelancers’ portfolios and ratings.
Video: https://youtu.be/bNijBSSSlUU
Group: 81
References
Krishna, V, 2010. Auction Theory. 2nd ed. : AcademicPress.
Li, T. (2016). Information Strategy – Lecture 5 [PowerPoing slides].
Upwork. 2016. If you’re hiring. [ONLINE] Available at: https://www.upwork.com/i/how-it-works/client/. [Accessed 5 October 2016].
Upwork. 2016. Find rewarding projects. [ONLINE] Available at: https://www.upwork.com/i/how-it-works/freelancer/. [Accessed 5 October 2016].
Li, T. (2016). Information Strategy – Lecture 3 [PowerPoing slides].
