Digital Dealing: How e-Markets Are Transforming the Economy

Rating:
Summary: A prelude to online, automated, intelligent eCommerce.
Review: In spite of predictions of doom by some, eCommerce is here to stay, and in fact will evolve into something that might be called "eDealing" or "eNegotiation". Whatever it is called, the ability to negotiate deals real-time on the Web is something that is coming fast, and will be driven by the need for transparency and efficiency in this kind of deal-making. The author has given an interesting but elementary account of what he has named "digital dealing", which could be read by anyone who is interested in this type of technology. All of the current financial institutions will eventually have to face up to the presence of e-markets in the months and years ahead. Due to space constraints, only the first four chapters will be reviewed here.

In chapter 1 of the book the author gives an overview of the nature of e-markets, and the phenomenon of "dickering" (bargaining or haggling) for the best price. Successful e-markets in his view must support automated versions of dickering, and engage in deal-making despite the desire to hide the 'best price'. The author gives four steps that he believes will ensure a successful e-commerce system: the identification of potential trading partners, followed by the transmission and reception of trading interest and dickering with potential partners, the actual carrying out the deal, and lastly the providing of the information about the deal to other traders. He also lists, and then discusses what he believes are the most effective e-market models: eBay, OffRoad, FreeMarkets, Nasdaq, Priceline, and Grainger. The author also discusses the need for transparency in terms of three categories, namely the identity of traders, the terms of the bids, and the terms of the deal. The author does not overemphasize the role of e-markets, and clearly many firms still using traditional business practices are feeling threatened by them. No doubt they will have to adapt to the organized, efficient, and rational nature of e-markets.

Chapter 2 overviews the "deal engines" that can do auctions, with the first example the author studying being the English auction, which is deployed by sites such as eBay, and which the author claims is the predominant form of auctioneering on the Internet. What is interesting about the eBay auction process, as pointed out by the author, is that it uses "proxy bidding", which does not require a bidder to be logged on in the bidding process. This automation of the bidding process will be even more powerful when it is extended to more elaborate financial transactions. The author also discusses the trade-offs involved in transparency during the bidding process. First-price and second-price sealed-bid auctions are also discussed, and the author compares these three different types of auctions according to their advantages for bidder and seller. The author also explains the use of the activity rule in making auctions more transparent. Even more importantly, the author discusses two-sided auctions, which are used in electricity auctions for example, and the various auction abuses that can occur.

In chapter 3, the author discusses various auction mechanisms that are in place for stocks and bonds. Treasury auctions are discussed first, the author pointing out the reason for such a thin tick in such auctions, namely that there is not a wide variation in the estimation of the price of Treasury bills by investors. The author discusses municipal bonds next, emphasizing the advantages of getting into the auction in the last minute. Due to their relatively new arrival in e-auctions, corporate bond auctions are discussed only briefly via the OpenBook auction house of W.R. Hambrecht, which the reader can get more information on if needed on the Web. This is followed by a very interesting discussion on auctions for private equity, with OffRoad Capital furnishing an example of selling private equity via a semi-open-book single-price auction. The author points out the similarity with mutual funds when investing in OffRoad, and discusses the three phases that OffRoad uses for selling a new issue of private equity. The author ends the chapter with discussions of the W.R. Hambrecht IPO auction and auctions for traded stock.

The author overviews, in chapter 4, the role of B-to-B procurement auctions in eMarkets, asserting that automated dickering is a playing a larger role in a business that is now at $100, 000, 000, 000, 000 worldwide. One of the downsides though for e-markets he says is that cooperation between buyer and seller will be difficult because of the standardization in the bid process. The negotiation that must occur when custom-made capital equipment is involved cannot be done easily in e-markets he claims. He is certainly correct if gauged by current standards, but online negotiation is now an intense area of research, and there are many new approaches that allow real-time negotiation online that will fill the requirements that the author discusses. FreeMarkets.com is discussed at the most successful of the online industrial procurement engines. The global supply management function of FreeMarkets has been profitable so far, the author argues, but its biggest problem is that one could use its platform to seek bids to replace its services. These services, according to the author, could become a commodity, with its price set to low levels via the capabilities that FreeMarkets has allowed the clients to use. The author contrasts FreeMarkets with Perfect.com, the latter of which provides software, called PerfectMarket, to actually serve as consultants for online virtual auctions. Suppliers are asked to formulate bidding strategies illustrating how they would respond to what is occurring during an auction. This procurement strategy can be refined by running auctions several times, and the bidding rules are kept secret by Perfect Market, which then effectively acts like a trusted third party. The author remarks that Perfect Market is the only auction system to use the second-price Vickrey principle where bids include more than one price. It is the opinion of this reviewer that online auctioneering will become even more sophisticated in the years ahead, due mainly to advances in machine intelligence.

Rating:
Summary: A prelude to online, automated, intelligent eCommerce.
Review: In spite of predictions of doom by some, eCommerce is here to stay, and in fact will evolve into something that might be called "eDealing" or "eNegotiation". Whatever it is called, the ability to negotiate deals real-time on the Web is something that is coming fast, and will be driven by the need for transparency and efficiency in this kind of deal-making. The author has given an interesting but elementary account of what he has named "digital dealing", which could be read by anyone who is interested in this type of technology. All of the current financial institutions will eventually have to face up to the presence of e-markets in the months and years ahead. Due to space constraints, only the first four chapters will be reviewed here.

In chapter 1 of the book the author gives an overview of the nature of e-markets, and the phenomenon of "dickering" (bargaining or haggling) for the best price. Successful e-markets in his view must support automated versions of dickering, and engage in deal-making despite the desire to hide the 'best price'. The author gives four steps that he believes will ensure a successful e-commerce system: the identification of potential trading partners, followed by the transmission and reception of trading interest and dickering with potential partners, the actual carrying out the deal, and lastly the providing of the information about the deal to other traders. He also lists, and then discusses what he believes are the most effective e-market models: eBay, OffRoad, FreeMarkets, Nasdaq, Priceline, and Grainger. The author also discusses the need for transparency in terms of three categories, namely the identity of traders, the terms of the bids, and the terms of the deal. The author does not overemphasize the role of e-markets, and clearly many firms still using traditional business practices are feeling threatened by them. No doubt they will have to adapt to the organized, efficient, and rational nature of e-markets.

Chapter 2 overviews the "deal engines" that can do auctions, with the first example the author studying being the English auction, which is deployed by sites such as eBay, and which the author claims is the predominant form of auctioneering on the Internet. What is interesting about the eBay auction process, as pointed out by the author, is that it uses "proxy bidding", which does not require a bidder to be logged on in the bidding process. This automation of the bidding process will be even more powerful when it is extended to more elaborate financial transactions. The author also discusses the trade-offs involved in transparency during the bidding process. First-price and second-price sealed-bid auctions are also discussed, and the author compares these three different types of auctions according to their advantages for bidder and seller. The author also explains the use of the activity rule in making auctions more transparent. Even more importantly, the author discusses two-sided auctions, which are used in electricity auctions for example, and the various auction abuses that can occur.

In chapter 3, the author discusses various auction mechanisms that are in place for stocks and bonds. Treasury auctions are discussed first, the author pointing out the reason for such a thin tick in such auctions, namely that there is not a wide variation in the estimation of the price of Treasury bills by investors. The author discusses municipal bonds next, emphasizing the advantages of getting into the auction in the last minute. Due to their relatively new arrival in e-auctions, corporate bond auctions are discussed only briefly via the OpenBook auction house of W.R. Hambrecht, which the reader can get more information on if needed on the Web. This is followed by a very interesting discussion on auctions for private equity, with OffRoad Capital furnishing an example of selling private equity via a semi-open-book single-price auction. The author points out the similarity with mutual funds when investing in OffRoad, and discusses the three phases that OffRoad uses for selling a new issue of private equity. The author ends the chapter with discussions of the W.R. Hambrecht IPO auction and auctions for traded stock.

The author overviews, in chapter 4, the role of B-to-B procurement auctions in eMarkets, asserting that automated dickering is a playing a larger role in a business that is now at $100, 000, 000, 000, 000 worldwide. One of the downsides though for e-markets he says is that cooperation between buyer and seller will be difficult because of the standardization in the bid process. The negotiation that must occur when custom-made capital equipment is involved cannot be done easily in e-markets he claims. He is certainly correct if gauged by current standards, but online negotiation is now an intense area of research, and there are many new approaches that allow real-time negotiation online that will fill the requirements that the author discusses. FreeMarkets.com is discussed at the most successful of the online industrial procurement engines. The global supply management function of FreeMarkets has been profitable so far, the author argues, but its biggest problem is that one could use its platform to seek bids to replace its services. These services, according to the author, could become a commodity, with its price set to low levels via the capabilities that FreeMarkets has allowed the clients to use. The author contrasts FreeMarkets with Perfect.com, the latter of which provides software, called PerfectMarket, to actually serve as consultants for online virtual auctions. Suppliers are asked to formulate bidding strategies illustrating how they would respond to what is occurring during an auction. This procurement strategy can be refined by running auctions several times, and the bidding rules are kept secret by Perfect Market, which then effectively acts like a trusted third party. The author remarks that Perfect Market is the only auction system to use the second-price Vickrey principle where bids include more than one price. It is the opinion of this reviewer that online auctioneering will become even more sophisticated in the years ahead, due mainly to advances in machine intelligence.