Multiple-issue auction and market algorithms for the world wide web

Abstract

The Internet is quickly changing the way business-to-consumer and business-to-business commerce is conducted in the world. The Electronic Revolution has also spawned a trend of price wars and, in some instances, chaos, because of the zero-sum nature of the electronic channel. The technology has created an opportunity to get beyond the lose–lose nature of single issue price wars by determining sellers' and buyers' preferences across multiple issues and encouraging negotiations, thereby creating possible joint gains for all parties. We develop simple multiple-issue algorithms and heuristics that could be used in electronic auctions and electronic markets, to match businesses to businesses and consumers based on dovetailing underlying interests and preferences. We provide arguments that such dovetailed matches should help stabilize markets and make them more efficient.

Introduction

In order to put our study into perspective, we present a market framework adapted from the work of Guttman and Maes [20](Fig. 1). The market framework consists of one or many buyers and one or many sellers. One buyer and one seller, assuming the current tendency towards non-fixed prices, defines a traditional negotiation. The negotiation may take place face-to-face or electronically. One seller and many buyers defines an auction which may be live or on-line. Many sellers and one buyer defines a reverse auction, an example being a government auction. Many sellers and many buyers defines a market or a double auction, which may be live or electronic. Live and electronic versions of stock exchanges exist. Guttman and Maes [20]also differentiate between traditional classified ad markets and traditional stock markets, the difference being that in traditional stock markets, there is a centralized multilateral exchange compared to classified ad markets, where trading is ad hoc and bilateral. Centralized multilateral exchange markets may become classified ad markets and vice versa due to revolutionary changes made possible through the Internet and the expansion of the world wide web for electronic commerce. An example of a previously classified ad market, which is becoming an exchange market, is the US home mortgage market. Traditional retail markets may offer an opposite example. Such markets are becoming more one-to-one, exhibiting features similar to classified ad markets (e.g., Egghead and Dell Computer). Some traditional markets and auctions offer the possibility of trading both electronically or live. Even the traditional large stock exchanges are moving in the direction of partially electronic markets.

Most existing live and electronic auctions and markets mainly focus on a single issue, namely price of the merchandise or stock [20]. There exists extensive literature demonstrating the detrimental effects of single issue, distributive (zero-sum) negotiations. Price wars are a concrete example, leading to a volatile market 1, 8, 21, 25. Exclusive focus on price will also do a disservice to buyers and sellers alike by hiding important value attributes from consideration. Following Guttman and Maes [19], an explicit consideration of such multiple value attributes holds the promise of converting distributive negotiations into integrative negotiations. See also the work of Kersten and Szpakowicz [27].

In this paper, we develop simple, heuristic algorithms for multiple-issue electronic markets and auctions, to match businesses with businesses and consumers based on dovetailing buyers' and sellers' underlying interests and preferences. We argue that such dovetailed matches should help stabilize markets and make them more efficient. To the best of our knowledge, there is very little literature on multiple-issue markets and auctions whether electronic or live. See, for example, the works of Bodendorf et al. [7], Kagel and Roth [23](pp. 416–421) and Reinheimer and Bodendorf [47]. When discussing auctions, we focus on auctioning a single good having multiple negotiable attributes/issues or multiple quantities of homogeneous goods, such as stocks. When discussing markets, we focus on the case of multiple diametrically opposed issues, as well as the case where quantity is a negotiable issue. A web site that runs the algorithms acts as the exchange mechanism.

The organization of the rest of the paper is as follows. In Section 2, we review the relevant literature. In Section 3, we discuss some theory of multiple-issue markets and auctions; in Section 4, auction algorithms and in Section 5, market algorithms. Section 6concludes the paper.