January 7, 2011 11:16 am

Something for the weekend

With the advent of the internet, online auction sites have grown rapidly. The seller, the buyer and the companies that run these sites all benefit but new research from the US has pinpointed how companies - and individuals - can extract the most revenue from online auctions.

Song Yao, an assistant professor of marketing at the Kellogg School of Management at Northwestern University and co-author Carl Mela, professor of business administration at the Fuqua School of Business, Duke University, suggest it is far more important to understand the relationship between buyers and sellers than has previously been thought. In this way the true value of each customer can be understood.

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The pair looked at data from a leading online auction company relating to the sale of Celtic coins. The company charged two fees to each seller, a listing fee and a commission. Changing the fees, altered the seller’s behaviour which in turn affected the buyer’s behaviour.

The academics demonstrated that if the auction house increased commission, revenues would then decrease, whereas raising listing fees would boost revenues. They suggest that commissions are “a form of high-value pricing discrimination”. Cutting commission for high-value sellers leads to increased seller profitability and a subsequent increase in listings for such items. Prof Yao and Prof Mela calculate that in the Celtic coin example if auction houses offered commission reductions to high-value sellers they would increase their revenues by 3.9 per cent.

The researchers have also discovered that online bidders tend to be more active at lunchtimes, at the end of the working day and at weekends. They suggest that sellers should try to arrange their online auctions so that they finish at these times.

Chief executives often receive a handsome bonus when their companies grow due to investments. But warn Partha Mohanram, associate professor of accounting at the Rotman School of Management, University of Toronto and Sudhakar Balachandran an accounting professor at Columbia Business School such rewards are misplaced. CEOs they say should only be given compensation if their companies grow due to increased profitability.

Rewarding CEOs when their companies grow due to investments, even though this has been demonstrated to damage long-term share holder value, sends a message to CEOs that their companies must “grow at all costs” say the pair.

Their research confirms previous studies that have shown that investment-related growth will destroy value. The authors state that company boards may not realise the consequences of their actions. “Many people don’t look long term,” adds Prof Mohanram, “We’re not alleging these guys are doing this on purpose...we just think this is a fallacy many people fall for.”

“It’s good to grow,” says Prof Mohanram, “but you have to grow in a way that adds value for shareholders”.

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