Online auctions contain costs

Online auctions help plant professionals contain costs and do more with less.

By Russ Kratowicz, P.E., CMRP, executive editor

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Plant maintenance and engineering professionals are responsible for procuring goods and services necessary to improve the plant or to keep it functioning. When that situation arises, the assets or services required are generally well defined. The plant professional then functions as a hunter, searching for something to fit a predefined mold.

The role of the hunter stands in contrast to that of the plant professional wandering the aisles of a trade show looking for great goods or services that might be useful in the plant. That former hunter now acts as a gatherer, gleaning fruits and berries from wherever they may present themselves.

Since there is a very high probability that the out-of-pocket expense involved in attending a trade show will greatly exceed the potential value of the ideas brought home, trade shows are not the most fertile ground for the gathering of berries having any significant financial benefit.

Nevertheless, the plant professional still must contain costs and do more with less. One possibility for doing this is by purchasing goods at auction. However, traveling to an auction site is just as costly as attending a trade show, and there is no guarantee you will come home with what you wanted. So, it might make sense to investigate online auctions in which you can participate from the comfort of your own office.

Glossary

What kind of auctions are we talking about? As you might suspect, several varieties of auctions exist. Probably the most familiar is the kind of auction associated with Christie’s and Sotheby’s well-publicized sales of art objects — rare and costly treasures and the personal effects of the famous. The television news clips show a room full of people bidding up the price of the item currently on the block. You know the routine — “Going once. Going twice. Sold to the gentleman in the chartreuse tuxedo.”

Since there is a very high probability that the out-of-pocket expense involved in attending a trade show will greatly exceed the potential value of the ideas brought home, trade shows are not the most fertile ground for the gathering of berries having any significant financial benefit.

– Russ Kratowicz, P.E., CMRP, executive editor

This manner of selling is called an English auction, or open bid auction. The bidding starts with some nominal amount and everyone participating hears the bidding history and the largest bid being offered. When the dust finally settles, the highest final bidder goes home with the goods.

There are, however, at least six other styles of auctions. The folks at the University of Mannheim in Germany post at http://www.sfb504.uni-mannheim.de concise explanations of the various classical auction types. Here you can learn about first price auctions, second price auctions, Dutch auctions, all-pay auctions and common value auctions.

Reserve versus absolute

It is possible that you could be the high bidder, perhaps high by a wide margin, and still not get the goods. If you were bidding in a reserve auction, the seller has in mind a minimum acceptable bid. If the amount bid is below the minimum, the seller retains the right to withdraw the item and not sell it.

An absolute auction, on the other hand, results in a sale, no matter what. The price some bidder is offering for the item is what the seller is obliged to accept. If there are few bidders in an absolute auction, it may be possible to acquire an item with a value that greatly exceeds the final auction price.

Getting organized

One should not simply jump into the auction game without a good reason for doing so. Inherent in the very definition of an auction is the strong presumption that there are participants other than you, and each of those other folks are playing for keeps. Like any adventure that requires the infusion of real-life money, one should have a good strategy as a defense against the possibility of getting fleeced.

There is an entire field of academic study, called game theory, for optimizing your outcome in multi-player games. An auction is only one example. Remember, those other bidders are adjusting their strategy in response to how you act in the game. Your response to what they do gives them even more information for optimizing a strategy.

You might as well do the same. Check out the final third of the posting at http://www.mba2.com/gametheory.shtml where you will find the fundamentals of game theory as they apply to auctions.

It’s what you need to know

One of the risks in playing the auction game is informational asymmetry. One party may know more than the other. It is like the situation you face when buying a used car from someone you don’t know. The current owner knows more about the vehicle than you know, and you are never going to find out those things unless you buy the car. By then, it may be too late. On the other hand, someone selling an old manuscript from Grannie’s attic trunk might not realize that it is a rare antique. There are risks on both sides of the transaction. In the auction game, it’s best to know more than the other bidders.

It’s what they need to know

Since we are using real money on these sites, every one of them requires you to register before you can participate as a buyer or seller. There is no anonymous trading in the online auction game. Some sites allow you to browse around before getting involved, others demand that you register just to see the action.

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