Online Auction Project (WriteUp)

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Most people are familiar with auctions involving, art, livestock or real estate, where an auctioneer (a seller) is looking for the highest price he can get

CHAPTER ONEINTRODUCTION1.1BACKGROUND TO THE STUDYMost people are familiar with auctions involving, art, livestock or real estate, where an auctioneer (a seller) is looking for the highest price he can get. It is also generally known that most government business (military supplies, construction, and most other government-bought goods and services) are contracted based on procurement auction, in which the auctioneer (buyer) looking for the lowest price. Publicly-owned assets (such as airwave frequencies, timer rights, oil leases, or public companies on their way to privatization) are also sold off by the government in auctions. Auctions, of course are not new. In fact, almost any buying and selling transaction can be viewed as the result of an auction process. A consumer looking at advertisements for automobiles, books or groceries can be viewed as auctioneer evaluating bids from competing suppliers. With the use of internet search engines such price comparisons are now commonplace. Many people are also familiar with Internet-based auction sites such as eBay,, UBid and others, where individuals and corporations sell a multitude of goods following specific auction rules. Companies buy most of the goods and services they use through procurement auctions, where the auctioneer (buyer) is looking for the lowest price (among other things) from the bidders (Klemperer 2004).

An auction is a process of buying and selling goods or services by offering them up for bid, taking bids, and then selling the item to the winning bidder. In economic theory, an auction may refer to any mechanism or set of trading rules for exchange.According to Klemperer (2004), there are four basic types of auctions that are commonly in used, these are the ascending-bid auction (also called the open, oral, or English auction), the descending-bid auction (also called the Dutch auction by economists), the first-price sealed-bid auction, and the second-price sealed-bid auction (also called the Vickrey auction by economists). In the ascending auction, the price is successively raised until only one bidder remains, and that bidder wins the object at the final price. This auction can be run by having the seller announce prices, or by having the bidders call out prices themselves, or by having bids submitted electronically with the best current bid posted. The descending auction works in exactly the opposite way, the auctioneer starts at a very high price, and then lowers the price continuously. The first bidder who calls out that he or she will accept the current price wins the object at that price. In the first-price sealed-bid auction each bidder independently submits a single bid, without seeing others bids, and the object is sold to the bidder who makes the highest bid. The winner pays her bid (i.e., the price is the highest or first price bid). In the second-price sealed-bid auction, each bidder independently submits a single bid, without seeing others bids, and the object is sold to the bidder who makes the highest bid. However, the price he or she pays is the second-highest bidders bid, or second price Klemperer (2004).

According to McAfee and McMillan (1987) sited by Emrah (2005), auction can be defined as a market institution with an explicit set of rules determining resource allocation and prices on the basis of bids from the market participants. Auctions are widely used in the markets to sell goods and to determine prices for those goods. It is one of the oldest ways of selling goods. Auctions are usually used in the markets in which seller does not have the ability to estimate or determine price of goods. Because the seller cannot determine price by itself, market employs some mechanism consisting of some rules to determine the price and to assign the goods to the demanding customers, Emrah (2005).

According to (Krishna 2002), "auction" is derived from the Latin word augre, which means "to increase" or "augment". For most of history, auctions have been a relatively uncommon way to negotiate the exchange of goods and commodities. In practice, both haggling and sale by set-price have been significantly more common. Indeed, prior to the seventeenth century the few auctions that were held were sporadic and infrequent (Shubik 2004). Nonetheless, auctions have a long history, having been recorded as early as 500 B.C. (Krishna, 2002). According to Greek historian, Herodotus, auctions of women for marriage were held annually in Babylon (Shubik, 2004). The auctions began with the woman the auctioneer considered to be the most beautiful and progressed to the least. It was considered illegal to allow a daughter to be sold outside of the auction method (Shubik, 2004).

During the Roman Empire, following military victory, Roman soldiers would often drive a spear into the ground around which the spoils of war were left, to be auctioned off. Later slaves, often captured as the "spoils of war", were auctioned in the forum under the sign of the spear, with the proceeds of sale going towards the war effort (Shubik, 2004). The Romans also used auctions to liquidate the assets of debtors whose property had been confiscated (Shubik, 2004). For example, Marcus Aurelius sold household furniture to pay off debts, the sales lasting for months (Doyle and Baska 2002). One of the most significant historical auctions occurred in the year 193 A.D. when the entire Roman Empire was put on the auction block by the Praetorian Guard. On March 23 The Praetorian Guard first killed emperor Pertinax, then offered the empire to the highest bidder. Didius Julianus outbid everyone else for the price of 6,250 drachmas per Guard, an act that initiated a brief civil war. Didius was then beheaded two months later when Septimius Severus conquered Rome (Shubik, 2004). From the end of the Roman Empire to the eighteenth century auctions lost favor in Europe (Shubik, 2004), while they had never been widespread in Asia. In some parts of England during the seventeenth and eighteenth centuries auction by candle was used for the sale of goods and leaseholds. This auction began by lighting a candle after which bids were offered in ascending order until the candle spluttered out. The highest bid at the time the candle extinguished itself won the auction (Patten, 1970).

The oldest auction house in the world is Stockholm Auction House. It was established in Sweden in 1674 (Varoli 2007). During the end of the 18th century, soon after the French Revolution, auctions came to be held in taverns and coffeehouses to sell art. Such auctions were held daily, and catalogs were printed to announce available items. Such Auction catalogs are frequently printed and distributed before auctions of rare or collectible items. In some cases these catalogs were elaborate works of art themselves, containing considerable detail about the items being auctioned.Sotheby's, now the world's second-largest auction house held its first auction in 1744. Christie's, now the world's largest auction house was established around 1766 (Varoli 2007). Other early auction houses that are still in operation include Dorotheum (1707), Bonhams (1793), Phillips de Pury & Company (1796), Freeman's (1805) and Lyon & Turnbull (1826) (Stoica, 2007). During the American civil war goods seized by armies were sold at auction by the Colonel of the division. Thus, some of today's auctioneers in the U.S. carry the unofficial title of "colonel" (Doyle and Baska 2002). The development of the internet, however, has lead to a significant rise in the use of auctions as auctioneers can solicit bids via the internet from a wide range of buyers in a much wider range of commodities than was previously practical.

1.2MOTIVATIONCorruption has virtually become a bane to economic growth in Nigeria today. Selfishness and personal interest of our leaders sometimes prevent them from awarding contract to the right person, instead, they would be looking for a low quality goods and services. Our manual methods of auctioning and procurement processes are not transparent, cost effective and time efficient. Lack of true market price and supply of inferior goods and services are not left out in the problems of manual method of auctioning. There are several formats of auctioning among which four prominent standards are English auction, Dutch auction, Blind auction (first price sealed bid auction) and Vickrey auction (second price sealed bid auction). Each of these has its own pros and cons. As efficient as English auction is in goods allocation, it is very prone to time wastage because an item may be auctioned for hours, days, weeks or even months by just little or insignificant price increment. It is equally a source of information leakages because the more the bidders contest for the purchase of item the more his or her financial worth is exposed. English auction also discourages weak bidders and encourages collusion. In case of first price sealed bid, collusion does not exist and it encourages more bidders which equally increases the sellers revenues. The major drawback of this model is the inefficient distribution of goods. Second price sealed bid auction does not efficient in revenue generation for the sellers while the Dutch auction does not give room for weaker bidders to partake in auction process.

eBay as pioneer auction web site offers several types of auctions, such as Auction-style listings, Fixed Price format and Dutch Auction but uses second-price sealed-bid auction plus one bid increment amount (i.e. some small predefined amount relative to the bid size), instead of simply the second-highest bid (Ford, 2007).

uBid is the second largest auction website in the world but its own services are limited only to the US residents. Its charges on any sales are very high (12.5%), this makes its services too expensive and put urgent sellers at disadvantage. uBid serves as intermediary between the sellers and the buyers, (, 2009).Due to all these problems, this research is motivated to design an online auctioning web site for Nigeria to reduce the problems associated with manual method and all other existing methods. The online auctioning method will provide several benefits among which but not limited to the following.

Price discovery: Some sellers (or buyers) do not know what an item or service is worth and how much should they sell or buy it for. An auction serves as a market test (in fact, this very term is used by many companies to describe an auction process) to ascertain what are the prevailing prices.

Winner determination: The auction process is used to determine who the object (contract, item, or whatever) should be allocated to, or who wins the auction.

Payment mechanism: The process can be used to determine how much the winner should pay. The traditional process when participants pay what they bid is only one of many possible pricing mechanisms. 1.3RESEARCH OBJECTIVESThe objectives of this research are to:a.formulate a hybrid auction model using English and Blind Auction Formats; and b.implement the design using web based application.

1.4RESEARCH METHODOLOGYThe relevant textbooks, journals, magazines, conference and workshop papers on English and Blind auctions were reviewed. The use of internet searching was also employed. The existing e-auction web sites such as,,, and were also reviewed.

The Model Assuming that there are n number of bidders, and each bidder i has a private value vi, which is a realization from a random variable Vi. All bidders values are assumed to be independently and identically (i.i.d.) distributed random variables drawn from a known probability density function, f() with cumulative distribution F().

English Auction (also called Ascending bid auction): This is the format of auction in which the price is successively raised until one bidder remains. The revenue of the seller in the English auction is equal to the second highest valuation among bidders. In terms of the order statistics this revenue is equal to v(N-1), where N is the number of bidders. Assuming that the valuations have a density function, f, it can be proved that . 1.1Where: E = the expected revenue v = the bidders valuation of the object auctioned off N = number of bidders = distribution function = density function Blind auction (1SB): This is the format of auction in which each bidder submits a single bid (independently) and the item is sold to the highest bidder who pays the winning bid. Thus, bidders are likely to shave their bids by some amount. By using the following assumptions that the bidders are risk-neutral who have independent-private-values with the symmetric signals and payment is a function of the bids alone, the Bayesian Nash equilibrium for each bidder is to bid by shaving his/her valuation. It can be proved in this case that a Bayesian Nash equilibrium for player i is to bid ...1. 2where vl is the lowest valuation each bidder can have (if the bidder bids less than this quantity he/she has zero surplus). Hence in terms of the order statistics the expected revenue of the seller in this case is equal to

The Hybrid auction ModelThis is generated as a combination of both English and Blind Auctions. The auction begins with the English auction and setting of the reserve price (minimum and maximum prices). The registered accredited qualified bidders will submit their bids which must not less than the current highest bid until (N = 3). Thereafter, the system will communicate to the last three bidders to submit their final bid from which the highest bidder shall be the winner and auction closes. The expected revenue for the auctioneer will be: ..Eq. 4

The web site development tools such as WAMP (Windows (i.e. operating system), Apache (web browser), MySQL (to generate the database) and PHP (i.e. scripting language) was used to design an interactive web site where the online auctioning shall be taken place. Visual Basic 6.0 was used to implement the winner selection module of the program.

1.5CONTRIBUTION OF THE RESEARCH TO KNOWLEDGEThis work is expected to provide a hybrid online auction format using English and Blind Auction Formats for the Nigerian environment.

1.6ORGANIZATION OF RESEARCHThe thesis shall consist of five chapters arranged in a logical and concise manner. Chapter Two focused generally on auction matter and the review of literatures of various authorities on auction issues. Chapter Three is all about the design of the various components of the proposed system. It takes care of the input, output and model designs. The implementation of the developed system is carried out in Chapter Four while Chapter Five gives the summary and conclusion of the research with app...