A private electronic market (PEM) uses the
Internet to connect a limited number or pre-qualified buyers or sellers in one
market. PEMs are a hybrid between perfectly open markets (e.g.
exchanges where there is no pre-existing relationship between buyer and seller - similar to
eBay
eBay Inc. ( ) is an American multinational e-commerce company based in San Jose, California, that facilitates consumer-to-consumer and business-to-consumer sales through its website. eBay was founded by Pierre Omidyar in 1995 and became a ...
) and closed contract negotiations (such as a
sealed bid
Seal may refer to any of the following:
Common uses
* Pinniped, a diverse group of semi-aquatic marine mammals, many of which are commonly called seals, particularly:
** Earless seal, or "true seal"
** Fur seal
* Seal (emblem), a device to impr ...
tender, where there is no visibility between competitors and hence no response to
competition
Competition is a rivalry where two or more parties strive for a common goal which cannot be shared: where one's gain is the other's loss (an example of which is a zero-sum game). Competition can arise between entities such as organisms, indivi ...
). The core idea of PEMs is to create competition among buyers/sellers while allowing buyers/sellers to adjust all those aspects of the deal that are typically only dealt with in a negotiation.
This creates a problem of "comparing
apples and oranges
A comparison of apples and oranges occurs when two items or groups of items are compared that cannot be practically compared, typically because of inherent, fundamental and/or qualitative differences between the items.
The idiom, ''comparing ...
": bids may be quite different in many dimensions and therefore cannot easily be compared. Apart from the dimension of price these could include pre-negotiated discounts (e.g. for loyalty), specific qualities, combinations of goods and services with conditional pricing, freight differentials, contract fulfillment timing, payment terms, or deliberate constraints such as market share limits.
Practical examples
VicForests
VicForests is a Government Backed Enterprise (GBE) operating in the Australian state of Victoria. It was created - as a state body under Section 14 of the ''State Owned Enterprises Act 1992'' - by the Victorian Government, being declared a state b ...
, a government-owned agency in
Australia, conducts bidding for native timber supply via a website called Forest Auctions. Saw Mills may submit bids specifying various conditions, including quantity, species of timber, and payment terms. Compared to the traditional sealed bid tender approach, the use of this private market reportedly resulted in a substantial revenue increase for VicForests.
Swiss
online auction site
Firstpex
FirstPEX is a private electronic market for private equity transactions that allows qualified investors to buy and sell equities to each other through a bidding process which enables the parties to find a mutually agreeable price. Its primary a ...
allows qualified
investors
An investor is a person who allocates financial capital with the expectation of a future return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some species of property. Typ ...
to buy and sell
private equities to each other through a bidding process.
Relevance
The overall effect of a well designed Private Electronic Market is what is described as
allocative efficiency
Allocative efficiency is a state of the economy in which production is aligned with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the mar ...
or in simple terms: a win-win for the seller (who maximizes revenue) and buyers (acquiring exactly what is of highest value to them). PEMs are based on
game theory
Game theory is the study of mathematical models of strategic interactions among rational agents. Myerson, Roger B. (1991). ''Game Theory: Analysis of Conflict,'' Harvard University Press, p.&nbs1 Chapter-preview links, ppvii–xi It has applic ...
and
combinatorial auction
A combinatorial auction is a type of smart market in which participants can place bids on combinations of discrete heterogeneous items, or “packages”, rather than individual items or continuous quantities. These packages can be also called lo ...
theory.
See also
*
Dark pool
*
Online auction
*
Electronic markets
Electronic markets (or electronic marketplaces) are information systems (IS) which are used by multiple separate organizational entities within one or among multiple tiers in economic value chains. In analogy to the market concept which can be vie ...
References
{{Reflist
Bibliography
Factors influencing suppliers’ participation in private electronic markets Sang M. Lee (Department of Management, University of Nebraska-Lincoln, 209 CBA, Lincoln, NE 68588–0491, USA) & Seong-bae Lim (Jones School of Business, SUNY-Geneseo, 103 South Hall, 1 College Circle, Geneseo, NY 14454, USA)
Transaction automation on the internet: open electronic markets, private electronic markets and supply network solutions Matteo Di Biagi in International Journal of Electronic Business (IJEB), Vol. 2, No. 6, 2004
Online marketplaces
Financial markets
Online auction