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Price and Pricing Mechanisms

Whether B2B or B2C, marketplace or single buyer-seller transactions, how we pay and with what are important finalizing elements in online commerce.

Electronic commerce technologies and business practices enable online stores and marketplaces to provide major innovations in pricing. Many are variations on pricing schemes that existed down through the history of commerce: barter, negotiated purchasing, bid-ask mechanisms, etc. Appearing on the Web, they are often portrayed as magically new and different. Not so.

Figure 1.2 Covisint, an Online Exchange for the Auto Industry

Among the popular pricing mechanisms are fixed price, "name your price," and a variety of auction formats. Fixed price, sometimes based on terms and conditions, is standard in B2B, but has many variations and combinations in B2C.

Auctions are very old market-making mechanisms that are now being used in both B2C and B2B markets. Typically, auctions work by spatial matching, that is, either the buyer or seller bids against availability while conforming to a floor or ceiling price. Depending on the type of auction, prices can rise or fall from a designated point. Auctions enable efficient management of inventory and a means to secure revenue for unwanted or

excess stock that cannot be easily sold through a fixed price mechanism. In a few commodity-like situations, dynamic pricing is beginning to play a role, adjudicating between demand and supply.

The ability to change prices and bring in different pricing mechanisms to support them is a significant innovation brought about by these new technologies. If there was ever any credence in using the term "new economy," it is in this area.

Flexibility to adjust demand and supply to keep both in equilibrium are long sought after by economists. Flattening the value chain to allow vendors at the top-most end of the value chain to be closer to sources of demand hopefully adds enough visibility for each producer along the way to maintain inventories and adjust supplies as required by those downstream.

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