This article discusses the advantages and disadvantages of using online marketplaces for buying and selling, and for using auctions as a means of setting prices.
One of the main benefits provided by online marketplaces is its relative transparency compared with one-to-one negotiation. MARS occasionally endured problems with its negotiations when situations arose where one valued supplier became upset when a competitor had been awarded a contract on terms which they would have been prepared to better. The transparency of online marketplaces means that availability, prices and stock levels are all accessible in an open environment.
Online marketplaces also provide greater opportunities for both buyers and suppliers to establish new trading partnerships. They create a global marketplace giving MARS access to many more potential suppliers. MARS currently relies on a small number of highly valued suppliers who, presumably, they have used for a number of years. This adheres to MARS’ ‘Mutuality’ principle on shared benefit but a potential danger is that these suppliers could take their respective contracts for granted and as a result, may not be providing MARS with the most competitive deal. An online marketplace allows MARS to see what else is available to ensure they are getting the best deal.
In relation, online marketplaces offer a convenient way to compare from a single source rather than having to spend time contacting and negotiating with each individual supplier as with the current system employed by MARS. Despite online marketplaces being global marketplaces they do not need to “involve any jet-setting or big-agency boon-doggling in far-flung lands” (Creamer 2007). Online procurement is a feasible alternative to face-to-face negotiations that require travel (Chin 2003). This aspect of online procurement will considerably reduce MARS’ travel, time and administrative costs. Some large companies have reported cost reductions of 10% or more through online procurement (businesslink.gov.uk).
Other advantages of using online marketplaces include the reduction of problems of time constraints and differing office hours associated with international trade as online marketplaces can operate 24/7.
However, there are many drawbacks to the use of online marketplaces. For example, MARS must disclose publicly a wealth of information relating to prices and stock levels amongst other things. It may not be desirable for MARS to make these things visible to customers or indeed competitors. This may jeopardise MARS’ ‘quality’ principle – customers could misinterpret MARS’ actions as an attempt to sacrifice quality for profit. It may also provide MARS ‘competitors with an insight in to their operating procedures and trade secrets.
Also, online marketplaces place “a brute force reliance on price.” MARS must be sure that when awarding a contract to the lowest bidder in a reverse auction, it is comparing like for like bids i.e. the lowest bid may also represent a significantly lower level of quality.
Auctions created by online marketplaces provide large companies with an opportunity to set prices.
E-auctions have allowed the NHS to "set the true market price" of supplies (Bradley 2005). By using procurement to award contracts MARS will be able to attract a much larger pool of potential suppliers which means that they can take advantage of the increased competition to gain a more competitive price for supplies as each supplier attempts to undercut the others. The main winner here is MARS as the profit margin for suppliers is driven down. However, if MARS chooses to set its prices in this way then it is in direct contradiction to the ‘Mutuality’ principle which places emphasis on shared benefit.
One other positive aspect of using auctions to set prices is the fact that prices set will be the most up to date available. Online marketplaces provide regular updated information on price and availability. Reverse auctions in particular provide MARS with the opportunity to create price competitions in a much shorter space of time.
However, using auctions to set prices could be irreparably damaging to the business relationships with MARS have developed with its small number of highly valued suppliers. Such relationships are based on trust, understanding and mutual benefit and help MARS to stick to all five core principles. These relationships can be considered intangible assets and no amount of money or cost reduction can replace them. Online marketplaces may quickly set a price but it takes years to develop these relationships. In a study by Kjerstad (2005) the main results are that auctions give thicker markets compared with negotiations, as expected, but that auctions do not result in significantly lower prices compared with negotiations.
Other potential dangers of using auctions to fix prices include suppliers which could make ‘predatory’ which may prove to be unsustainable in practice (Bradley 2005). For example, Supplier One who offers $2,050 to supply all Mars display boxes could be so desperate to win the contract that they have come in with a bid which is over ambitious and unfeasible. This means that any prices fixed using the data from this particular auction will be inaccurate.
Another danger is that suppliers could inflate prices if they are certain that MARS will invite them to participate in a reverse auction. For example, Supplier 6 notices a lack of competition for the supply of 3 Musketeers display boxes and decides to bid a certain price where they would easily be able to supply cheaper. Such incidences would also make prices fixed by auction inaccurate.
MARS must consider all of these aspects if it is to consider online marketplaces.
REFERENCES
Bradley 2005
NHS uses e-auctions to set the true price of goods
Supply Management. London: Vol. 10, Iss. 21; pg. 12, 1 pgs
Chin 2003
Reverse auctions come home to roost -- Allocation does little to dampen OEM enthusiasm for online tool
EBN. Manhasset: pg. 1
Creamer 2007
Gillette taps 9,000 creatives online
Advertising Age. (Midwest region edition). Chicago: Vol. 78, Iss. 37; pg. 1, 2 pgs
Kjerstad 2005
Auctions vs negotiations: a study of price differentials
Health Economics. Chichester:. Vol. 14, Iss. 12; pg. 1239
http://www.businesslink.gov.uk/bdotg/action/detail?type=RESOURCES&itemId=1075387458
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