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Inquiring minds
Is misbehavior rampant in online reverse auctions?
Sandy D. Jap, the Caldwell Research Fellow Associate Professor of Marketing, has established herself since 1999 as a reliable and regular source of knowledge on online reverse auctions. Used as a tool for industrial sourcing, reverse auctions are so named because the sellers bid instead of the buyers, and the prices are bid down instead of up. Although online reverse auctions are thought of as a cost-cutting strategy for businesses, they have also taken on a more dubious reputation as a source of unethical behavior. Jap, along with doctoral student Martha Myslinski, explores this darker side in one of her latest papers, “Misbehavior in Online Reverse Auctions: What, When, and Why.”
Q. Have online reverse auctions always been viewed suspiciously?
A. From the very first company I studied in 1999, suppliers did not like the idea of these reverse auctions. They saw them as weapons that the buyers were using to try to squeeze more margins out of them. Around the same time, lots of people in the trade press were writing about how reverse auctions were bad for your relationships and were instruments for opportunism.
Q. What kind of “misbehavior” is considered most prevalent?
A. The one thing that the majority of buyers and suppliers are most concerned about is phantom bidding, or shill bidding. This is the idea that the buyer is pretending to be a supplier and trying to force the price down to create artificial competition. Suppliers are concerned that buyers are doing this and buyers are concerned that other buyers out in the marketplace are doing this, giving the whole process a bad name.
Q. What was your most surprising finding?
A. Our results indicate that people are more likely to cheat in face-to-face physical auctions as opposed to online. We attribute this to the fact that the hard record of what each participant does in an online reverse auction possibly discourages potential misbehavior. It’s also hard to signal in online auctions. Whereas in a face-to-face auction, if I know the guy across the room and he’s my competitor and colluding, I might possibly signal him with a wink or a gesture. There are many more ways to communicate face-to-face than online.
Q. Are online reverse auctions instruments of opportunism?
A. Misbehavior, certainly in online auctions, may be overblown by the media. You really need a deeper understanding of it and not just the knee-jerk conclusion that online reverse auctions are bad and encourage opportunistic, unethical behavior. It’s not that straightforward. It’s important to understand the different ways that buyers and suppliers might misbehave. And when they do misbehave, understand the reasons why.
—Diana Drake