The auction itself can add to transaction costs because there are so many steps required prior to holding an effective bidding event. RFQs must be prepared and suppliers must be selected and screened based upon prior experience and their relationships with competitors. For custom engineered goods, there is typically a long conversion process, requiring the supplier to build or install new tooling, produce sample parts, and have those samples tested by the buyer s engineering staff. Only after all these steps have been conducted can routine orders flow. Auctions usually reduce prices by 15 percent or more due to the transparency of prices and information.
Every auction is different.
When buyers seek products that are supplied by fragmented suppliers that have little chance of supplier collusion, then the auction process can be programmed to show bidders the current market price and indicate the number of active bids while disguising the bidders identities. For example, instead of showing bidders the current market price, they may be shown what rank their own bid earns. There are a lot of benefits to buyers in running an Internet auction. Besides cheaper prices, an auction can be finished within hours rather than weeks that is typical for many traditional bidding events. Because Internet auctions are interactive, and prices decline slowly near the end, it is often the case that the best two or three bidders are within only a couple percentage points.