Private electronic market

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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.

Practical example[edit]

VicForests, a government-owned agency in Australia, regularly invites a number of saw mills to bid for native timber supply via 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[edit]

The overall effect of a well designed Private Electronic Market is what is described as allocative efficiency 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.

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