CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

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. 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, Amazon.com, 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.

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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 bidder’s 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

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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 augēre, 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

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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

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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.

1.2 MOTIVATION

Corruption 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.

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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

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makes its services too expensive and put urgent sellers at disadvantage. uBid

serves as intermediary between the sellers and the buyers, (ubid.com, 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.

1.3 RESEARCH OBJECTIVES

The 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.

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1.4 RESEARCH METHODOLOGY

The 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 eBay.com, yahoo.com,

uBid.com, bidnigeria.com and amazon.com 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

E [ v(N −1)]=E [v( N)−1−F (v( N))

f (v(N )) ]…………………………………………………………. 1.1

Where:

E = the expected revenue

v = the bidder’s valuation of the object auctioned off

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N = number of bidders

F (v(N )) = distribution function

f (v(N )) = 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

si¿ ( v i ):=v i−

∫v l

v i

[F (x )]N −1dx

[ F (v i)]N −1

……………………………….…………………………..1. 2

where 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

E=[v ( N )−∫vi

v (N )

[ F(x )]N −1dx

[ F(v i)]N −1 ]… … … … … … … … … … … … . … … … … … … … … … … … ...1.3

The Hybrid auction Model

This 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

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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:

E=¿ …………………..………………………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.

1.5 CONTRIBUTION OF THE RESEARCH TO KNOWLEDGE

This work is expected to provide a hybrid online auction format using English and

Blind Auction Formats for the Nigerian environment.

1.6 ORGANIZATION OF RESEARCH

The 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 appropriate recommendations.

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CHAPTER TWO

LITERATURE REVIEW

2.1 ELECTRONIC AUCTION SYSTEM

Electronic auction or bidding is a selling or procurement tool which utilizes web-

based technology to enable bidders to participate in dynamic and transparent pricing

events. An e-Auction is an electronic “reverse” auction where suppliers use internet-

based software to bid against each other online and in real time against a published

specification. E-Auctions can be based on price alone or can use transformational

bidding to account for other criteria such as quality and delivery

(eprocurement@scotland.gsi.gov.uk). An e-auction or reverse auction allows

suppliers to compete for the business by outbidding each other in terms of quality,

price and/or other criteria. The e-auction allows this to take place ‘real-time’ on the

internet (www.nepp.0rg.uk).

Electronic auctions are on-line auctions where selected bidders submit offers

electronically against the purchaser’s specification. Electronic auctions can be used

for goods, services and works. Only price and quality elements which can be

expressed as a value suitable for incorporation within a formula can be included at

the auction stage. Other quality aspects must be assessed prior to the auction stage

(www.ogc.gov.uk).

According to Investment Division, Ministry of Finance, Republic of Trinidad and

Tobago (2009), e-Auction is a part of the strategic sourcing process. It is a

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procurement tool using web-based software that allows suppliers to bid online for a

contract and for the supply of goods or services. It is sometimes called a ‘reverse

auction’ because bids are reduced and not increased as in a traditional auction. The

objective of auction is typically to arrive at the lowest total cost as distinct from the

lowest price. e-Auction replaces the conventional methods of requesting sealed

paper tenders, however, it must be emphasized that success depends on at least

the same market knowledge and sourcing skills as the paper-based process it

replaces.

2.2 THE EVOLUTION OF THE e-AUCTION

Auctions have been around for centuries. People with goods wanted an efficient way

to sell those goods to people who wanted those goods. For many people, the

memory of an auction involves a fast-tongued auctioneer belting out numbers to a

loosely organized crowd. Historically, the highest level of technology used for an

auction involved plugging a microphone into a wall.

Then someone realized that the Internet could be more than a paperless catalog.

The Internet could be used to expand the universe of potential buyers for any one

item. It could be used by buyers to compare goods more efficiently and accurately.

Anyone could enjoy an auction from a comfortable seat unencumbered by time or

location.

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The online auction proved to be a great application of technology for those wishing

to sell products. Traditionally, the auction represented the seller and involved one

seller to many buyers. Auctions helped drive up prices for the seller. Fortunately,

technology worked equally well for buyers, especially buyers working on behalf of a

professional organization. Now auctions could be used to represent the buyer and

help drive prices down. Over the years, various auction formats were devised and

executed, including the most well-known format, the reverse auction. Rather than

having one seller with many buyers, a reverse auction involved one buyer with many

sellers. Sellers placed decreasing bids on a set of goods or services and followed

the same set of rules.

2.3 TYPES OF AUCTION

According to Emrah (2005), the main issues of auctioning can be classified into:

a. auctioning mechanism

b. number of units put to the auction at once

c. number of stages at which the auction is ended.

2.3.1 Auctioning Mechanisms

Auctioning mechanisms can be basically divided into two, primary auction and

secondary auction. Primary auction has four basic formats which can be further

grouped into open and sealed auction.

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a. English auction: This is also known as an open ascending price auction.

This type of auction is arguably the most common form of auction in use today

(Krishna 2002). Participants bid openly against one another, with each subsequent

bid higher than the previous bid. An auctioneer may announce prices, bidders may

call out their bids themselves (or have a proxy call out a bid on their behalf), or bids

may be submitted electronically with the highest current bid publicly displayed. In

some cases a maximum bid might be left with the auctioneer, who may bid on behalf

of the bidder according to the bidder's instructions. The auction ends when no

participant is willing to bid further, at which point the highest bidder pays their bid.

Alternatively, if the seller has set a minimum sale price in advance (the 'reserve'

price) and the final bid does not reach that price the item remains unsold.

Sometimes the auctioneer sets a minimum amount by which the next bid must

exceed the current highest bid. The most significant distinguishing factor of this

auction type is that the current highest bid is always available to potential bidders.

The English auction is commonly used for selling goods, most prominently antiques

and artwork, but also secondhand goods and real estate. At least two bidders are

required (McAfee and McMillan 1987).

b. Dutch auction: This is also known as an open descending price auction

(Krishna 2002). In the traditional Dutch auction the auctioneer begins with a high

asking price which is lowered until some participant is willing to accept the

auctioneer's price. The winning participant pays the last announced price (McAfee

and McMillan 1987). The Dutch auction is named for its best known example, the

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Dutch tulip auctions. ("Dutch auction" is also sometimes used to describe online

auctions where several identical goods are sold simultaneously to an equal number

of high bidders (eBay 2009). Dutch auctions can also be used for perishable

commodities. In practice, however, the Dutch auction is not widely used (Krishna

2002).

c. Blind auction: This is also known as a first-price sealed-bid auction (FPSB).

In this type of auction all bidders simultaneously submit sealed bids so that no bidder

knows the bid of any other participant. The highest bidder pays the price they

submitted. This type of auction is distinct from the English auction, in that bidders

can only submit one bid each. Furthermore, as bidders cannot see the bids of other

participants they cannot adjust their own bids accordingly. Sealed first-price auctions

are commonly used in tendering, particularly for government contracts and auctions

for mining leases (McAfee and McMillan 1987).

d Vickrey auction: This is also known as a sealed-bid second-price auction.

This is identical to the sealed first-price auction except that the winning bidder pays

the second highest bid rather than their own (Krishna 2002). This is very similar to

the proxy bidding system used by eBay, where the winner pays the second highest

bid plus a bidding increment (e.g., 10%) (Krishna 2002). Although extremely

important in auction theory, in practice Vickrey auctions are rarely used (McAfee and

McMillan 1987).

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Secondary Types of Auction

a. All-pay auction: This is an auction in which all bidders must pay their bids

regardless of whether they win. The highest bidder wins the item. All-pay auctions

are primarily of academic interest, and may be used to model lobbying/bribery (bids

are political contributions) or competitions such as a running race (Milgrom 2004).

b. Buyout auction: This is an auction with a set price (the 'buyout' price) that

any bidder can accept at any time during the auction, thereby immediately ending

the auction and winning the item. If no bidder chooses to utilize the buyout option

before the end of bidding the highest bidder wins and pays their bid. Buyout options

can be either temporary or permanent. In a temporary buyout auction the option to

buy out the auction is no longer available after the first bid is placed. In a permanent

buyout auction the buyout option remains available throughout the entire auction

until the close of bidding. The buyout price can either remain the same throughout

the entire auction, or vary throughout according to preset rules or simply at the whim

of the seller (Gallien and Gupta 2007).

c. Combinatorial auction: This is any auction for the simultaneous sale of more

than one item where bidders can place bids on an "all-or-nothing" basis on

"packages" rather than just individual items. That is, a bidder can specify that he or

she will pay for items A and B, but only if he or she gets both. In combinatorial

auctions determining the winning bidder can be a complex process where even the

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bidder with the highest individual bid is not guaranteed to win (Pekec and Rothkopf

2003).

d. No-reserve auction (NR): This is also known as an absolute auction, is an

auction in which the item for sale will be sold regardless of price. From the seller's

perspective, advertising an auction as having no reserve price can be desirable

because it potentially attracts a greater number of bidders due to the possibility of a

bargain (Fisher 2006). Good and Lynn (2007) state that If more bidders attend the

auction a higher price might ultimately be achieved because of heightened

competition from bidders. This contrasts with a reserve auction, where the item for

sale may not be sold if the final bid is not high enough to satisfy the seller. In

practice, an auction advertised as "absolute" or "no-reserve" may nonetheless still

not sell to the highest bidder on the day, for example, if the seller withdraws the item

from the auction or extends the auction period indefinitely (Leichman 1996),

although these practices may be restricted by law in some jurisdictions or under the

terms of sale available from the auctioneer.

e. Reserve auction: This is an auction where the item for sale may not be sold

if the final bid is not high enough to satisfy the seller - that is, the seller reserves the

right to accept or reject the highest bid (Good and Lynn 2007). In these cases a set

'reserve' price known to the auctioneer, but not necessarily to the bidders, may have

been set in advance below which the item may not be sold (Fisher 2006). A reserve

auction is safer for the seller than a no-reserve auction as they are not required to

accept a low bid, but this could potentially result in a lower final price than might

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otherwise be the case if this means that less interest is generated in the sale (Good

and Lynn 2007).

f. Reverse auction: This is a type of auction in which the role of the buyer and

seller are reversed, with the primary objective to drive purchase prices downward. In

an ordinary auction (also known as forward auction), buyers compete to obtain a

good or service. In a reverse auction, sellers compete to provide a good or service

by offering progressively lower quotes until no supplier is willing to make a lower bid

(Schoenherra and Mabertb 2007).

g. Silent auction: This is a variant of an English auction where bids are written

on a sheet of paper. At the predetermined end of the auction the highest listed

bidder wins the item. This auction is often used in charity events, with many items

auctioned simultaneously with a common finish time. The auction is "silent" in that

there is no auctioneer, the bidders writing their bids on a bidding sheet often left on a

table near the item (Milgrom 2004). Other variations of this type of auction may

include sealed bids. The highest bidder pays the price he or she submitted (Isaac

and Schnier 2005).

h. Walrasian auction or Walrasian tâtonnement: This is an auction in which the

auctioneer takes bids from both buyers and sellers in a market of multiple goods.

The auctioneer progressively either raises or drops the current proposed price

depending on the bids of both buyers and sellers, the auction concluding when

supply and demand exactly balance. As a high price tends to dampen demand while

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a low price tends to increase demand, in theory there is a particular price point

somewhere in the middle where supply and demand will match (Milgrom 2004).

2.3.2 Classification based on the Number of Units in Auction

According to Emrah (2005), an auction can be classified into single unit, or multi unit.

In the single unit auctions, bidders prepare bids for only one item at a time. In the

multi unit auctions, bidders give bids for more than one items at a time. A multi unit

auction can be realized in the form of either single bid or combinatorial auction. In

single bid auctions, the bidder offers one bid for each item that he is interested

among a whole set of goods available in the auction. In the combinatorial auctions,

the bidder gives one bid for the combination of all the items that he wants to buy. For

example, consider three different pictures to be sold in a sealed-bid-auction and

there are two bidders (customers). The seller puts these three different pictures into

auction at the same time (i.e., a multi unit auction case). Bidder 1 is interested in

buying pictures 1 and 2. Bidder 2 wants all the pictures. In the single bid auction, the

seller asks for the bids from the bidders as one distinct bid for each picture. Bidder 1

bids $300 for picture 1 and $250 for picture 2. Bidder 2 bids $250 for picture 1, $300

for picture 2, $150 for picture 3. At the end of first iteration (i.e. collecting bids from

the bidders at one stage) the seller gives picture 1 to bidder1, pictures 2 and 3 to

bidder 2. In the combinatorial auction case, the seller wants bids from the bidders for

the whole combination of the pictures they are interested in buying. Bidder 1 bids

$550 for the combination of pictures 1 and 2. Bidder 2 bids $700 for the combination

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of pictures 1, 2 and 3. The seller assigns all three pictures to bidder 2 because

bidder 2 offers more money as a total amount.

2.3.3 Classification based on the Number of Stages at Auction

The auctions are also classified as either single stage auctions or iterative auctions.

In the single stage auctions, the auction is finalized at the end of one single stage (or

iteration) after taking bids from the bidders. In the iterative auctions, auction is

implemented in a number of iterations. Each iteration has its own characteristics by

the means of auction methods utilized. In the previous example, now consider a

single bid in a sealed-bid-auction. Bidder 1 bids $300 for picture 1 and $250 for

picture 2. Bidder 2 bids $300 for picture 1, $300 for picture 2 and $150 for picture 3.

The seller assigns picture 2 and picture 3 to bidder 2. Since the seller cannot decide

on picture 1, he decides to go on to the second iteration. This time, he opens an

English outcry auction with the constant increment of $10. Bidder 1 increments bid to

$310. Bidder 2 responds by a bid of $320 and so on. At the end, after bidder 2 bids

$390, bidder 1 bids $400. Bidder 2 does not respond to bidder 1 therefore the

picture goes to bidder 1 with the price of $400. The auction finishes at second

iteration. At the end bidder 1 gets picture 1, and bidder 2 gets picture 2 and picture 3

(Emrah 2005)

Figure 2.1: Classification of Action

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All-Pay Auction

Buyout

Primary Auction

Secondary Auction

Mechanism

Vickery Auction

English

Sealed First Price Auction

Dutch

2.4 BENEFITS OF ELECTRONIC AUCTIONS

2.4.1 Market Transparency

An electronic reverse auction with multiple, qualified bidders can be used to flush out

the true market price of the auctioned items. Furthermore, this information can be

used as the basis for real-time benchmarks for future sourcing projects. Auctions

spark healthy competition, which can help all participants understand the true market

value and identify areas where they need improvement. A buyer benefits by knowing

true – often lower – costs. Suppliers benefit by knowing the market rate so they can

review their own business or pricing model.

2.4.2 Decreased Error Rate

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Since the bidders enter their own bids, there is less chance of human error during

bid transcription and importation into a common bid file. The ability to run preliminary

price rounds and the ease of online editing all serve to help catch mistakes and

clarify requirements before the auction commences.

2.4.3 Increased Buying Reach

Unlike traditional auctions that limit a buyer to the suppliers who can converge to a

common location and time, electronic reverse auctions give a buyer access to a

global supply base, including suppliers in low cost countries.

2.4.4 Unifying Force for Process Improvement

An electronic auction is one of the cornerstones of an efficient, executable, strategic

sourcing process. It enables Sourcing Teams to streamline purchasing processes by

creating standard formats for purchasing across any spend category. Electronic

reverse auctions simplify bid collection, bid comparison and centralize relevant data

in a central location for easy query and display. This reduces cycle time, decreases

the chance for human error, and provides a solid foundation for award analysis and

optimization. Auctions encourage high cost producers to increase their emphasis on

the identification and elimination of process waste, an effort that sometimes leads to

revolutionary improvements and significant cost reductions in the long term.

2.4.5 Cycle Time Reductions

Online auctions can be coordinated in a manner of days and conducted in an hour –

shaving weeks from the traditional offline process. Furthermore, auctions force key

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players to focus and make decisions in a timely manner. They also accelerate

awards, and this benefits all participants who want to grow sales faster.

2.4.6 More Time for High Value Activities

The drastic reduction in data collection efforts and cycle time leave more time for

high value activities such as spend analysis, strategy selection, and award

optimization.

2.4.7 Direct Cost Reductions

Successful reverse auctions immediately reduce the cost of acquisition (that would

otherwise be paid) for each item successfully auctioned.

2.4.8 Less time to complete

Since this process helps the buyers to be more efficient, the suppliers will receive

more information, receive it faster, and benefit from a quicker award decision.

2.4.9 More benefit from having more upfront planning

Suppliers can be confident that the award process has been more thoroughly

thought through and the chance of contract being awarded is very high.

2.4.10 Transparency of process

There will be far fewer unknowns at the conclusion of the process from the supplier

perspective. If other best practices are adhered to, they should be very aware of

23

what was important in the award decision and also will know how competitive their

pricing was, relative to other suppliers.

2.4.11 Better communication / more completeness

One of the more frustrating things for suppliers is trying to compete for business

where they can sense the lack of preparation and can foresee the failure of the

project. Better communication and data accuracy builds more confidence in the

buyer goal and stronger participation.

2.4.12 Lower cost of sales

The costs associated with the sales cycle to obtain new customers and retain

existing customers can be quite high. By participating in online events, suppliers can

streamline processes and reduce cost associated with finding and responding to

RFPs.

2.5 DISADVANTAGES OF ELECTRONIC AUCTIONS

The following are some of the problem associated with electronic auctions:

a. Bid Shielding: The use of phantom to bid at a very high price when an auction

begins is called bid shielding. The phantom bidders pull out at the last minute,

and the bidder who bids with a very low price wins.

b. Shilling: A similar type of fraud can be conducted by sellers. In this fraud

sellers arrange to have fake bids placed on their items to artificially jack up

bids.

24

c. Fake Photos and Misleading Descriptions: Some sellers distort what they can

truly sell or fail to disclose all relevant information about the items.

d. Improper Grading Techniques: A seller might describe an item as 90 percent

new, whereas the bidder, after receiving the item and paying the full amount,

feels that it is only 70 percent new.

e. Bid Siphoning: Luring bidders to leave a legitimate auction by offering to sell

the same item at a lower price.

f. Selling reproduction as originals: A seller sells something that the seller

claims is original, but it out to be a reproduction.

g. Failure to pay: Buyers do not pay after a deal is agreed upon.

h. Failure to pay the Auction House: Sellers fail to pay the auction’s listing or

transactions fees.

i. High Shipping Costs and Handling Fees: Some sellers just want to get little

more cash out of bidders. Postage and handling rate vary from seller to seller.

j. Failure to ship merchandise: Money was paid out, but the merchandise never

arrives.

k. Loss and Damage Claims: Buyers claim that they did not receive an item or

that they received it in damaged condition and then ask for a refund.

25

l. Fake Escrow Services: Presenting itself as an independent trusted third party,

a fake services will take the seller’s items and the buyer’s money and

disappear.

m. Switch and Return: The seller has successfully auctioned an item, but when

the buyer receives it, the buyer is not satisfied. The seller offers a cheerful

refund. However, what the seller gets back is mess that does not much

resemble the item that was originally shipped.

n. Other Frauds: Many other types of fraud are also possible, these include the

sale of stolen goods, the use of false identities, providing false contact

information, and selling the same item to several buyers.

2.6 COMBATING OR PROTECTING AGAINST ELECTRONIC AUCTIONS

FRAUD

The following are some of the methods by which the electronic auctions fraud can be

prevented.

a. User Identity Verification: This is the verification of the users’ identities

supplied to the auction house.

b. Authentication Services: Product authentication is a way of determining

whether an item is genuine and described appropriately. Authentication is

26

very difficult to perform because it relies on the expertise of the

authenticators.

c. Grading services: Grading is a way of detecting the physical condition of an

item, such as poor quality or mint condition. The actual grading system

depends on the type of item being graded.

d. Feedback Forum: The feedback forum allows registered buyers and sellers to

build up their online trading reputation. It provides users with the ability to

comment on their experience with other individuals.

e. Insurance Policy: The insurance services should be provided at no cost to the

users by the auctioneer.

f. Escrow Services: This is done by involving third-party services when either

the buyer or seller feels the need for additional security. The buyer mails the

payment to the escrow service, which verifies the payment an alert the seller

when everything checked out. At that point, the seller ships the goods to the

buyer. After an agreed-upon inspection period, the buyer notifies the services,

which then sends a check to the seller.

g. Nonpayment Punishment: There should be an implementation of punishment

policy against those who do not honor their winning bids.

h. Appraisal Services: Appraisers use a variety of methods to appraise items,

including expert assessment of authenticity and condition and reviewing what

comparable items have sold for in the marketplace in recent months. An

appraised value is usually accurate only at the time of appraisal.

27

i. Physical Inspection: Providing for a physical inspection can eliminate many

problems.

j. Buyer Protections: This is the responsibility of the auctioneer to the buyers

against the non-received items or items that are not as described in the

listing.

2.7 REVIEW OF SOME OF THE RELATED WORKS

Recent years have seen a rapid increase in the number of online auction sites that

allow both private individuals and businesses to trade goods within a virtual

worldwide market. Prominent examples included eBay, uBid, and Yahoo!, (David et

al 2007). While there are many minor implementation differences between these

online auctions (e.g., the availability of proxy bidding services, the use of a fixed or

variable auction duration, and the ability to set both starting and reserve prices),

these auctions have been modelled on real-world counterparts, and thus, in general,

they all share two common features (Lucking-Reiley 2000). First, they are

predominantly based on the ascending price English auction, whereby bidders submit

bids to an auctioneer in an open fashion and the auction price increases until no

bidder is willing to bid higher. Second, they typically exhibit discrete bid levels,

whereby the bids that the bidders may submit within the auction are restricted to

certain levels either through a minimum bid increment that the next bid must exceed

as in eBay or by forcing the auction price to increase through a set of predetermined

price levels as in the popular Israeli auction site www.olsale.com (David et al 2007).

28

The academic literature on auction theory has almost solely considered auctions in

which the bid increment is continuous, and thus bidders may submit extremely small

increments in order to outbid the current highest bidder. As such, it has typically been

assumed that neither the bidders nor the auctioneer have any time constraints and

that bidding is not a costly process. However, the prevalence of the discrete bid

protocols within both real-world and an online auction challenges both these

assumptions. More significantly, the existence of discrete bid levels causes many of

the well-known results from the continuous bid auction literature to fail.

Chwe (1989) assumed fixed bid increments but considered a first price sealed bid

auction where bidders’ independent valuations were uniformly distributed. He showed

that a symmetric unique Nash equilibrium bidding strategy exists and that this

equilibrium converges to the equilibrium of the continuous bid auction as the bid

increment reduces to zero. In addition, he showed that the expected revenue of the

discrete bid auction is always less than that of the equivalent continuous bid auction.

Thus, the auctioneer has an incentive to make the bid increments as small as

possible, assuming that the time and communication costs of the bidding can be

ignored.

Yu (1999) also considered auctions with fixed bid increments but studied each of the

four common auction protocols: the first-price sealed-bid, second-price sealed-bid,

English, and Dutch auctions. Extending Chwe’s result, Yu showed that in each of the

auction protocols asymmetric pure strategy equilibrium exists. Specifically, no

29

dominant strategy was identified for the English protocol. However, for each of the

protocols, she proved that as the number of bid levels become very large (i.e., the bid

increment becomes small), the equilibrium bids converge to those of the

corresponding continuous bid auction.

Rothkopf and Harstad (1994) considered the more general question of determining

the optimal number and value of the bid levels. They provided a full discussion of

how the discrete bid levels affect the expected revenue of the auction, and they

considered two different distributions for the bidders’ private valuations: a uniform and

an exponential distribution. In the case of the uniform distribution, they considered

two specific instances (i) two bidders with any number of allowable bid levels, and (ii)

two allowable bid levels and any number of bidders. In the first instance, even

spacing of bid levels (i.e., a fixed bid increment) was found to be optimal. In the

second instance, the optimal bid increment was shown to decrease as the auction

progressed. In the case of the exponential distribution of bidders’ valuations, the

instance of just two bidders was again considered, and the optimal bid increment was

shown to increase as the auction progressed.

David et al (2007) extended the work of Rothkopf and Harstad, they initially

considered the same model of the ascending price auction but derive the optimal bid

levels in the general case with any distribution of bidders’ valuations, any number of

bid levels, and any number of bidders. Moreover, they then extended this model to

incorporate the more realistic case that there might be uncertainty in the number of

30

bidders who might enter the auction. In addition, they explicitly considered the costs

of the auctioneer, and, in both cases, they were able to determine optimal bid levels.

They described the probability of the auction closing at any particular bid level by

considering three exhaustive and mutually exclusive cases. These three cases are

described below: Klemperer (2004)

Figure 2.2. The three cases whereby the auction closes at the bid level li. In each

case, the circles indicate a bidder’s private valuation, and the arrow indicates the bid

level at which that bidder was selected as the current highest bidder.

The expected revenue of the auction is dependent on the probability of each of these

three cases occurring. Each of these probabilities can be described in terms of the

cumulative distribution function of the bidders’ valuations, F(v). They wrote P(Case1,

li) for the probability that Case 1 occurs, and that the auction closes at bid level li .

31

This probability can be computed by considering the probability of having k bidders

with valuations between bid levels li and li +1 (this happens with probability [F(li +1) −

F(li)]k) while the other n − k bidders have valuations below li (this happens with

probability F(li)n−k). Summing over all possible values of k gives:

P (case 1, li )=∑k=2

n

(nk) F (li)

n−k ¿

They performed a similar calculation for Case 2, and considered the probability that

the bidder with the highest valuation was the current highest bidder. Under the

assumption that the selection is random, the probability is simply given by 1

k+1 , and

thus the whole expression is given by:

P (case 2 ,li )=∑k=1

n−1

(n−1k ) n

k+1F ¿

Finally, they considered Case 3, which was identical in form to Case 2 with the

exception that the bidder with the highest valuation was not nominated as the current

highest bidder at bid level li−1 and must thus raise the price to li . The probability of this

occurring was k

k+1 , rather than

1k+1

as in Case 2. Thus, the final expression was:

P ¿

As these three expressions completely describe all the possible ways in which the

auction may close at any particular bid level, they computed the expected revenue of

the auctioneer by simply summing over all possible bid levels and weighting each by

the revenue that it generates, li . Thus the expected revenue of the auction is given

by:

32

E=∑i=0

m

li [ P (case 1 ,li )+P (case 2 , li )+P ( case3 , li ) ] … … … … … … … … . … .. …2.4

The equation 2.4 was simplified to arrive at

E=∑i=0

m

F ¿¿¿

Mohammad et al (2006) worked on a heuristic price prediction and bidding strategy

for internet auctions. In their work, they discussed some usual auctions and pricing

estimation. In single seller English action, desired goods are sold by a specific seller.

Goods price are mostly related to production circumstances, goods production

procedure and environmental conditions, but instant goods price has nothing to do

with number of instant customers. Actually in this kind of auction, goods are

adequately available and proffer is proper to buyers' demands and so there is no

competition between buyers in purchasing goods. The first problem appears in this

kind of auction is calculation of goods general price that can be estimated by

checking auction treatment in long period of auction's life. Suppose current time is tn

its price is pn , also price announcing period is constant. The estimated price value

can be obtained by eq. 2.6.

p=pn+ (tn+1−t n )× (α i−δ )………………………………………………….. 2.6

Where tn is current time, pn is current price, α=pn−i+1− Pn−i

tn−i+1−tn−i

is declivity and δ=∑i=1

k−1

δ i×i

∑i=1

k−1

i=

declivity difference. If estimated price was less than current price, good purchase

should be postponed. Also if obtained estimation was in acceptable range and a little

higher than current price, this good purchase can be supersedured, considering

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buying or not decision of this good can be changed by related auctions'

circumstances. If price starts going up rapidly or prices get much higher value than

maximum available and if current decision is to buy from this auction, this decision

should be made as soon as possible.

In Nth Price English Auction according to Mohammad et al (2006), offers and

requests are not necessarily proportional because amount of offered goods are

constant and equal to n. So sometimes requests for buying goods are higher than

amount of limited offers and in this case offered prices raises higher and higher and

this auction has a high risk about adapted final price. In this case prices are raised

rapidly by buyers considering high demands and absurd prices are created in these

kinds of auctions due to high demands. Another note is that in these auctions that n

similar goods are presented, all are sold by the price of nth proper suggestion not by

price of each of the suggestions. Then suggested price increase procedure should

be traced continuously. Next price estimation can be made by help of a simple linear

regression using last three price values. if the price growth rate is higher than an

acceptable value, buying from other alternative proper markets with lower price or

less growth rate should be tried.

In Continuous Double Auction, any one can sell their goods in any desired price so

there is no special law for increasing or decreasing price, also this auction price

treatment is too complex and un-modelable because there are different and arbitrary

factors on this treatment. In this auction, raising or declining price treatments usually

34

have a special procedure and prices fluctuates continuously, buyer's desired price

and auction closing remaining time has a principal role in decision making. Usually

when auction closing time is nearer probability of successful dealing is less and

expected benefit decreases inevitably. Eq. 2.7 is considered for appropriate price

estimation.

ptcurrent=pmin+t close−t current

t close−t start

× p profit …………………………………………... .2.7

In eq. 2.7, pmin is the least good's price, tclose is auction closing time, tstart is auction

start time and tcurrent is current time. Also pprofit is the maximum selling benefit for seller

that should be selected how that availability of buyer is probable. Result of this

equation is ptcurrent that estimates proper price for current time. Of course more

complex prices can be used for specifying proper price, but this function acts

appropriately for proper price prediction in these auctions. After specifying

appropriate price, if a request for buying be in price rage of (ptcurrent - ᵟ,∞)(ᵟ is a small

value for covering prices very near to ptcurrent), the good would be sold in proper price.

Also in case of not having an appropriate offer, an offer with this price can be added

to the auction for selling that of course new specified price which is obtained from

eq. 2.7 is announced to auction in specific periods. It is the same in case of buying a

good too, with the difference that the maximum good's proper price will be replaced

by equation's constant value, and estimated price is always less than acceptable

maximum price, At the end of auction estimated price would be very near to

acceptable price. Eq. 2.8 can be used for estimating proper buying price.

ptcurrent=pmax+t close−t current

t close−t start

× p profit ………………………………………….. 2.8

35

That pmax is maximum acceptable price. In this part more complex functions by time

can also be used for specifying price. Actually in these categories of markets we

should consider that as the market does not have a specific price treatment, the deal

should be started whenever any appropriate buying or selling price were available in

the market.

Since a user would not keep on buying from an auction and a specific good

continuously, and so algorithms which need much time for learning the auction's

treatment is not useable in few clients markets. Actually the important point in these

algorithms is that there is not so much learning time in stores and any learning or

statistical method which needs much information for appropriate action is not

useable for these environments. This algorithm can not be useable in very short time

and so can not be used in real world markets.

Anders Lunander in 1999 worked on procurement bidding in first-price and second-

price sealed bid common value auctions, he examined the magnitude of the

difference in expected outcome between first-price and second-price sealed bid

auctions. The study was limited to two empirical specifications of bidders’ signals:

Weibull and normal distribution. The optimal bid functions and the expected

procurer’s cost under both auction formats were derived. Simulations were

undertaken to analyze the impact that random draws of signals have on the

differences in outcome from the two auction formats. Using estimates from structural

estimation in previous empirical work on first-price auction data, where Weibull and

normal distributions of signals have been applied, the hypothetical expected gain

36

from witching from a first-price sealed bid auction to a second-price sealed bid

auction mechanism is computed.

It was shown that the superiority of the second-price auction over the first-price

auction in terms of expected procurer’s cost is related to changes in the number of

bidders and the dispersion of signals. Given the distributions of signals and cost, the

second-price auction is most beneficial when there are very few bidders or when

there is high dispersion of bidders’ signals. The simulations also indicated that the

probability of getting a better outcome when using the second-price auction, given a

moderate number of bidders (>5), is about two-thirds. Making use of the results from

Paarsch (1992), who found the common value model consistent with observed

behavior, he estimated that the predicted hypothetical gain of switching to the

second-price auction may be significant for a small number of bidders (<5) but is

relatively low for a larger number of bidders.

2.8 AUCTION ASSUMPTIONS

In designing of any auction, the effect of the following assumptions must be carefully

considered if such an auction must be successful.

2.8.1 Information

Information could be asymmetric or symmetric but for any auction to be free, fair and

credible, the signal must be equal to all bidders. Asymmetric information in auction

design could lead to collusion, jump bidding, e.t.c which could affect the outcome of

the event. Paul Klemperer in his paper titled Auctions with almost common values:

The ‘Wallet Game’ and its application published in European Economic Review 42,

37

1998 used a classroom game called ‘Wallet Game’ to show that the outcome of any

standard auction would highly sensitive to small asymmetries between or among

bidders (almost) common value settings. He had emphasised that small value

advantages, small ownership shares and small entry costs and many other more

may lead to very bad outcome for a seller.

The revenue equivalence theorem assumes that bidders’ valuations are drawn from

the same distribution. If the valuations are drawn from different distributions, there

will be “strong” bidders, whose values are drawn from higher distributions of

valuations than “weak” bidder, Klemperer (2004). He said further that If the bidders’

valuations are also interdependent and their signals affiliated, the effect of

asymmetries may be even more pronounced. The winning bidder in an English

auction will have to pay a price that no other bidder was willing to pay.

2.8.2 Reputation Advantage

A related but different phenomenon takes place when one of the bidders

establishes a reputation for aggressiveness. In other words, he usually bids high.

This is particularly relevant for procurement auctions since these auctions are

repeated regularly with many of the same vendors bidding for the business. A

reputation established in one auction can be carried to the bidder’s advantage in

the next auction. The reputation advantage is then self-reinforcing and will result in

lower revenues for the auctioneer, Klemperer (2004)

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2.8.3 Risk aversion

According to Klemperer (2004) an increase in any participant’s bid will increase his

chance of winning but reduce the value of a win. Thus, if participants are worried

about not winning, they would bid higher in first-price auctions. This provides them

with some “insurance” (at the cost of the incremental bid) against losing.

Auctioneers, then, should prefer a first price sealed bid auction to an English

auction. But with common values and random affiliated signals, participants may

also be worried about bidding too high and winning with negative surplus.

2.9 REVIEW OF WAMP

2.9.1 Microsoft Windows

This is a series of graphical interface operating systems developed, marketed, and

sold by Microsoft. Microsoft introduced an operating environment named Windows

on November 20, 1985 as an add-on to MS-DOS in response to the growing interest

in graphical user interfaces (GUIs) (Microsoft, 2007). Microsoft Windows came to

dominate the world's personal computer market, overtaking Mac OS, which had

been introduced in 1984. The most recent client version of Windows is Windows 8;

the most recent server version is Windows Server 2008 R2; the most recent mobile

version is Windows Phone 7.5

2.9.2 Apache

The Apache HTTP Server, commonly referred to as Apache, is web server software

notable for playing a key role in the initial growth of the World Wide Web (Netcraft,

39

2009). In 2009 it became the first web server software to surpass the 100 million

website milestone (Netcraft, 2009). Apache was the first viable alternative to the

Netscape Communications Corporation web server (currently named Oracle iPlanet

Web Server), and since has evolved to rival other web servers in terms of

functionality and performance. Typically Apache is run on a Unix-like operating

system (www.secure1.securityspace.com) Apache is developed and maintained by

an open community of developers under the auspices of the Apache Software

Foundation. The application is available for a wide variety of operating systems,

including Unix, FreeBSD, Linux, Solaris, Novell NetWare, Mac OS X, Microsoft

Windows, OS/2, TPF, and eComStation. Released under the Apache License,

Apache is open-source software. Apache was originally based on NCSA HTTPd

code. The NCSA code has since been removed from Apache, due to a rewrite.

Since April 1996 Apache has been the most popular HTTP server software in use.

As of March 2012 Apache was estimated to serve 57.46% of all active websites and

65.24% of the top servers across all domains (Netcraft, 2012). Apache supports a

variety of features, many implemented as compiled modules which extend the core

functionality. These can range from server-side programming language support to

authentication schemes. Some common language interfaces support Perl, Python,

Tcl, and PHP. Popular authentication modules include mod_access, mod_auth,

mod_digest, and mod_auth_digest, the successor to mod_digest. A sample of other

features include Secure Sockets Layer and Transport Layer Security support

(mod_ssl), a proxy module (mod_proxy), a URL rewriter (also known as a rewrite

40

engine, implemented under mod_rewrite), custom log files (mod_log_config), and

filtering support (mod_include and mod_ext_filter).

Popular compression methods on Apache include the external extension module,

mod_gzip, implemented to help with reduction of the size (weight) of web pages

served over HTTP. ModSecurity is an open source intrusion detection and

prevention engine for web applications. Apache logs can be analyzed through a web

browser using free scripts such as AWStats/W3Perl or Visitors. Virtual hosting

allows one Apache installation to serve many different actual websites. For example,

one machine with one Apache installation could simultaneously serve

www.example.com, www.example.org, test47.test-server.example.edu, etc. Apache

features configurable error messages, DBMS-based authentication databases, and

content negotiation. It is also supported by several graphical user interfaces (GUIs).

It supports password authentication and digital certificate authentication. Apache has

a built in search engine and an HTML authorizing tool and supports FTP.

2.9.3 MySQL

MySQL is an open source database management system and is used in some of the

most frequently visited websites on the Internet. According to Robin and Arjen

(2007) it is the world's most used relational database management system (RDBMS)

that runs as a server providing multi-user access to a number of databases. MySQL

is written in C and C++. Its SQL parser is written in yacc, and a home-brewed lexical

41

analyzer named sql_lex.cc (www.dev.mysql.com). MySQL works on many different

system platforms, including Linux, Mac OS X, Microsoft Windows, Novell NetWare,

OpenBSD, etc. MySQL implements the following features, which some other

RDBMS systems may not:

Multiple storage engines, allowing one to choose the one that is most effective for

each table in the application (in MySQL 5.0, storage engines must be compiled in; in

MySQL 5.1, storage engines can be dynamically loaded at run time). These

storages include Native storage engine which was made the default as of 5.5,

Partner-developed storage engines, Community-developed storage engines and

Custom storage engines. Commit grouping, gathering multiple transactions from

multiple connections together to increase the number of commits per second.

MySQL has the following limitations: MySQL does not currently comply with the SQL

standard for some of the implemented functionality, including issues like silent ignore

of standard SQL syntax, including silent ignore of check constraints, foreign key

references, and other features used to enforce business logic consistency.

2.9.4 PHP

PHP is a general-purpose server-side scripting language originally designed for Web

development to produce dynamic Web pages. It is one of the first developed server-

side scripting languages to be embedded into an HTML source document, rather

than calling an external file to process data. Ultimately, the code is interpreted by a

Web server with a PHP processor module which generates the resulting Web page.

42

It also has evolved to include a command-line interface capability and can be used

in standalone graphical applications. PHP can be deployed on most Web servers

and also as a standalone shell on almost every operating system and platform free

of charge (www.us.php.net).

PHP was originally created by Rasmus Lerdorf in 1995. The main implementation of

PHP is now produced by The PHP Group and serves as the formal reference to the

PHP language. PHP is free software released under the PHP License, which is

incompatible with the GNU General Public License (GPL) due to restrictions on the

usage of the term PHP (Kerner, 2008). While PHP originally stood for "Personal

Home Page", it is now said to stand for "PHP: Hypertext Preprocessor", a recursive

acronym (www.us.php.net).

According to Trachtenberg (2004) PHP is a general-purpose scripting language that

is especially suited to server-side web development where PHP generally runs on a

web server. Any PHP code in a requested file is executed by the PHP runtime,

usually to create dynamic web page content or dynamic images used on Web sites

or elsewhere. It can also be used for command-line scripting and client-side

graphical user interface (GUI) applications. PHP can be deployed on most Web

servers, many operating systems and platforms, and can be used with many

relational database management systems (RDBMS). It is available free of charge,

and the PHP Group provides the complete source code for users to build, customize

and extend for their own use.

43

PHP acts primarily as a filter, taking input from a file or stream containing text and/or

PHP instructions and outputting another stream of data; most commonly the output

will be HTML. Since PHP 4, the PHP parser compiles input to produce bytecode for

processing by the Zend Engine, giving improved performance over its interpreter

predecessor (Lerdorf, 2007).

2.10 RELATIONAL DATABASE MODEL

Relational model for database management is a database model based on first-

order predicate logic, (Codd, 1970). Its central idea is to describe a database as a

collection of predicates over a finite set of predicate variables, describing constraints

on the possible values and combinations of values. The content of the database at

any given time is a finite (logical) model of database, i.e. a set of relations, one per

predicate variable, such that all predicates are satisfied. A request for information

from the database (a database query) is also a predicate. The purpose of the

relational model is to provide a declarative method for specifying data and queries:

user directly states what information the database contains and what information he

or she want from it, and let the database management system software take care of

describing data structures for storing the data and retrieval procedures for getting

queries answered.

44

45

CHAPTER THREE

SYSTEMS ANALYSIS AND DESIGN

3.1 Overview of Systems Analysis and Design

A system can be described as the integration and interaction of autonomous and

independent components or parts working as a whole to achieve a particular goal. A

system’s purpose is the reason for its existence and the reference point for

measuring its success.

3.1.1. Systems Analysis

Systems Analysis is defined as the examination of a system or problem with the goal

of either improving an existing system or designing and implementing a new one

Microsoft (2002). It also defined (in computing science context) as the determination

of the data processing requirements of an organization, project, procedure, or task,

and designing of computing systems to fulfill them (Microsoft, 2009).

As outlined by Chandor et at (l977); the following are the main functions of the

systems analysis:

i. Problem Identification: Before embarking on a systems project, a clear

statement and understanding of the problem must be made; otherwise, the

solution produced will not meet the needs that it is supposed to and the whole

project may well prove to be abortive. Thus, the first important task of a

systems analyst is to obtain a definition of the problem. The subject of the

project, and its boundaries, as well as the objectives and hope-for benefits

must be specified as precisely as possible in a written systems project

assignment.

46

ii. Investigation of the existing system: This stage can be divided into an interim

survey, followed by a full scale systems investigation. The purpose of an

interim survey is to provide a guide from which to estimate the time needed

for a full scale investigation and the resources required to carry the

investigation out. The interim survey will normally cover the following points:

Volume of work; staff involved; time involved; costs of present system. The

interim survey will not propose solutions but obtain facts highlighting areas for

further investigation and defining the extent of the problem. A full scale

systems investigation follows the interim survey. It is thus essential to plan

such an investigation carefully, breaking it down into series of separate

projects. In assigning tasks and breaking down a detailed investigation into

separate project, it is essential to determine what facts are to be looked for,

so that unnecessary detail is not included. Documentation of the results of the

investigation is essential. From the result of the investigation, one can

determine the best way of meeting the real needs of the system.

iii. Design of a new system: The designing of a new system is a creative function

and, as such, requires proper attention and understanding of the result

obtained from the system investigation. However, in the design of a new

system some of the following activities normally take place:

Re-appraise the original terms of reference of the investigation in the

light of results so far obtained.

Reflect again on the results of the analysis of the existing system

47

Determine precisely what output will be required from the new system

and how it will be used.

Determine the data items required in order to produce the required

output.

Decide on the medium and format of all input and output, taking into

account hardware and software available and timing requirement.

Devise efficient methods for processing input to obtain output, making

use of software available and defining any special program required.

Devise an efficient method of data collection. This is particularly

important, since the results produced by the system depend on how

accurate, complete and up-to-date the raw data input to the system is.

Define in detail all the clerical procedures and documentation (e.g. turn

around documents, source documents) required at the data capture

stage.

Decide how the system is to cope with changes and modification. No

system design is perfect, nor can any analyst predict completely the

requirements of any system in the future. Thus, as much flexibility as

possible; must be incorporated into all parts of the system.

3.1.2. Systems Design

System Design is the development of the actual mechanism for a workable system.

It is finalized plan for problem solution. During this stage, the analyst focuses

attention on ways in which calculations be performed in the system. A detailed

48

system design is desired as it is the basis for future computer programming and

system implementation. The quality of the design depends among other things; on

the quality of the results made available from the investigation as well as the quality

of individual involved in the design process. A team of system designers tactfully

map out the procedures and the materials required for the successful development

of the new system. The systems design stage is the architectural stage that dictates

precise operations and the necessary resources required for accomplishment of the

desired result. Thus, if the design is faulty, definitely a faulty system will be built.

Therefore, this stage requires proper attention, understanding of the requirement,

and the use of personnel possessing requisite experience and skills.

A good system design among other things must possess the following

characteristics:

i. It must ultimately meet the requirement specification of the new system. In

other words, it must be effective.

ii. It must be efficient, that is; capable of achieving the desired result with

minimum use of resources, time, and effort.

iii. The design must be user’s-friendly. That is, it must not be ambiguous.

iv. It must be flexible such that it can be easily modified to meet future changes

v. It must be maintainable

vi. It must have a comprehensive and accurate system documentation where the

various components of the system are spelt out with their functions and how

these components integrate and interact with one another.

49

3.1.3 Analysis of the New System

The design of the system is divided into the following:

a. Input Design

b. Output Design

c. Processing Design

a. Input Design

This is concerned with procedure followed in entering data into the system which will

be later processed and transferred into the output data files. The designs of the input

files include:

Bidder Registration: This is the file that is used to collect data from the intended

bidders. BidIndex is generated by the system after the successful registration of a

new bidder. The input format is describe below.

Bidder’s_Registration {ReferenceId, BidderName, ContactAddress, PhoneNo,

EmailAddress, Password, BidIndex}

Seller Table: This is another input file that is used to collect data from the intended

sellers. SellerIndex is generated by the system after the successful registration of a

new seller. The seller’s input format is describe below.

Seller’s_Registration {SellerName, ContactAddress, PhoneNo, EmailAddress,

Password, SellerIndex}

Product Table: This file is used to collect data about a new product to be auctioned

from the intended sellers. ProductIndex is generated by the system after the

50

successful registration of a new product. The input format of the product table is

describe below.

Product’s_Registration {ProductIndex, ProductName, ProductDescription,

SellingPrice, ReservedPrice, SellerIndex, TagNo, PictureName}

Bidding Table: This is the file that collects and keeps the data about all bids.

BiddingIndex is generated by the system after the successful submission of a new

bid. The input format of the bid table is describe below.

Bidd’s_Registration { BiddingIndex, BidDate, BidTime, BidIndex, ProductIndex, Bid}

b. Output Design

This aspect of the design indicates the result generated from the processed data

directed and shown on the screen or printed by the printer. The output files comprise

of the following:

Bidder Registration Report: This is the file that is used to display the information

about the successful registered bidders. The output format of the bidder’s

registration report is describe below.

Bidder’s_Registration {S/No, ReferenceId, BidderName, ContactAddress, PhoneNo,

EmailAddress}

Seller Report Table: This is another output file that is used to display the

information about the successful registered sellers. The output format of the seller

report table is describe below.

Seller’s_Registration {S/No, SellerName, ContactAddress, PhoneNo, EmailAddress}

51

Product Report Table: This file is used to display the information about the

successful registered product to be auctioned from the successful registered sellers.

The output format of the product report table is describe below.

Product’s_Registration {S/No, ProductIndex, ProductName, ProductDescription,

SellingPrice, TagNo}

Bidding Report: This is the file that shows the information about all the bids. The

output format of the bidding report table is describe below.

Bidd’s_Registration {S/No, Date, Time, Bidders, ProductIndex, Bid}

3.2 The Model

Prior to the model development, it is important to state a precise definition of the

concept and list the assumptions to be used in the model. By relaxing or completely

changing some of these assumptions new results are obtained. An Auction,

according to McAfee and McMillan (1987), is "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 typically analyzed by assuming that all bidders

follow the same strategy, resulting in (Nash) equilibrium. At equilibrium no player can

improve his expected profit by altering his strategy unilaterally.In this propose

auction model, the following assumptions shall be assumed:

52

a. The bidders are risk-neutral. That is, obtaining a payoff equal to zero after

taking part in the auction is the same than obtaining a payoff of zero without

submitting any bid.

b. Every bidder knows precisely how much he/she values the item. Additionally,

the valuations among bidders are independent and the distributions of these

valuations are common knowledge. This is known as the independent-

private-values assumption.

c. The bidders are symmetric in the sense that the beliefs of the bidders and

seller about the others valuations are common.

d. Payment is a function of the bids alone.

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(•)

3.2.1 Distribution and density function

Given a continuous random variable X, the distribution function of X, denoted by F,

is defined by equation 3.1.

F ( x )=Pr ( X ≤ x )……………………………………………………………….……….3.1

When this function is differentiable, X has a density function which is defined by

equation 3.2.

53

f ( x )= dFdx

( x )=F ' (x)……………………………………………………………………3.2

For instance, if X is uniformly distributed on [a,b] in figure 3.1, the density function of

x is f(x) = 1/(b-a) if a ≤ x ≤ b and f(x) = 0, otherwise.

3.2.2 Expected revenue in the English Auction

English Auction (also called Ascending bid auction): This is the format of auction in

which the price is successively raised until one bidder remains. For example,

Assume that an item is being offered with only two risk-neutral bidders, bidders 1

and 2. The seller and bidder j (j=1,2) know that bidder i's valuation of the item is

either vil with probability pi or vi

h with probability 1-pi (i=2,1). Suppose that 0< vil < vi

h

for i=1,2. Assume further that the valuation of the item is independent among bidders

(independent-private-values). Also, assume that v1l=v2

l=:vl, v1h=v2

h=:vh and p1=p2=:p

(symmetric information). The payoff function for bidder i (=1,2), is either 0 if he never

bids over bidder j (=2,1), or vl-(i's bid), or vh-(i's bid), depending on his/her valuation

of the item, if he bids over bidder j (=2,1). The winner of the auction is the bidder with

the highest valuation who calls his/her bid first. In order to obtain the average price

paid by the winner of the auction, the concept of order statistic is employed.

54

1/(b-a)

a b

Figure 3.1: Uniform density function

3.2.3 Order statistic

Suppose that X1, ..., XN are independent random quantities equally distributed, i.e for

any value x the probability that Xi is less than or equal to x is the same for all i. We

define the k-th order statistic, denoted by X(k), as the k-th smallest value among

X1, ..., XN. For instance, in the example presented above if vi is the valuation of

player i for i=1,2, and player 1 has a highest valuation than player 2, then v(1)=v2 and

v(2)=v1.

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

E [ v(N −1)]=E [v( N)−1−F (v( N))

f (v(N )) ]………………………………………...………………...3.3

Where:

E = the expected revenue

v = the bidder’s valuation of the object auctioned off

N = number of bidders

F (v(N )) = distribution function

f (v(N )) = 1

√2 πe− x2/2

= density function

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3.2.4 Expected revenue in the first-price sealed-bid auctions

First price sealed bid 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

si¿ ( v i ):=v i−

∫v l

v i

[F (x )]N −1dx

[ F (v i)]N −1

……………………………….…………………..……… 3.4

where 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

E=[v ( N )−∫vi

v (N )

[ F(x )]N −1dx

[ F(v i)]N −1 ]… … … … … … … … … … … … … … .… … … … … … … … … ...3 .5

3.2.5 Expected revenue in the Hybrid auctions

This is generated as a combination of both English and First-Price Sealed-bid

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 > 1 and N

<= 3). Thereafter, the system will communicate to the last three bidders to submit their

56

final bid from which the highest bidder shall be the winner and auction closes. The

expected revenue for the auctioneer will be:

E=¿ …………………..………………………….. 3.6

HYBRID AUCTION WEB SITE NAVIGATOR

57

Figure 3.3: Hybrid Auction Object Model

58

Notification

Terms of Sale Rules

Bid validate Bid evaluate Bid update Notification

method content

Trade

Deal specificsWinner/Losers

Message

Message type

Participant

AuctionState

Start auction Close auction Accept message

Seller Buyer SearchProduct

Create View

Trader

Create message

Auction House

Add trader Add product

is a

sent by

sent to

CHAPTER FOUR

SYSTEM IMPLEMENTATION

4.1 PRODUCT ASSESSMENT

Grading is a way of detecting the physical condition of an item and the actual

grading system depends on the type of item being graded. The grading in this

system is done by firstly invite the expert valuers to value the item to be sold and

determine its financial worth. Thereafter, messages are sent to all the members of

staff of the organization to visit the website and register as bidders if they are

interested.

4.2 OPERATION OF THE NEWLY DEVELOPED SYSTEM

Screen Shots:

Index Page: This is the first page that will be displayed when a user visits the site. It

contains the major links for the site.

Figure 4.1: Index Page

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Admin. Page : The admin page is limited to the authorized administrators. This

page allows authorized administrator to login and at the same allows the

administrator’s password to be modified.

Figure 4.2: Admin. Page

Main Menu : This page contains links that are restricted to authorized

administrators. Some of these menu options (links) are sellers registration, Seller

Registration Modification, Product Registration, Home Page and generation of

reports

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Figure 4.3: Main Menu

Seller Registration: As the name implies, this page allows sellers to register online.

It is only registered sellers that are allowed to bring their products for auction.

Figure 4.4: Seller Registration

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Seller Record Modification: This page allows authorized administrators to modify

specified seller’s records on demand.

Figure 4.5: Seller Record Modification

Product Registration: This page allows authorized administrators to register

products to be auctioned.

Figure 4.6: Product Registration

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Bidder’s Registration: This page allows interested bidders to register in order to

be eligible to bid for products of their choice.

Figure 4.7: Bidder Registration

Bidder’s Login Page : This page is limited to the registered bidders. It allows

registered bidders to login and at the same allows the modification of his/her

password.

Figure 4.8: Bidder Login Page

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Bidder’s Menu : This page allows registered bidders to modify their information,

submit their bids and check the bid status.

Figure 4.9: Bidder’s Menu

Bidding Form: This page allows registered bidders to submit their bids on any

chosen product.

Figure 4.10: Bidding Form

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Bid Status: This page allows registered bidders to view the list of product(s) that

require submision of the final bid.

Figure 4.11: Bid status

View Products: This page allows anybody that visits the website whether registered

user or not to have the information about all the products available for auction.

Figure 4.12: View Products

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Menu Form: This is Visual Basic 6.0 form with only File menu from which an

administrator can do the bidders selection, communicate the wining bidders to

submit their final bids and close the bidding

Figure 4.13: Selection Module Menu Form

Selection Form: This form allows administrator to select and tag the last two or

three highest bidders and notify them to submit their final bid.

Figure 4.14: Selection Form

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Final Bid Submission Form: This form allows administrator to view the final bids

submitted by the last two or three selected bidders.

Figure 4.15: Final Bid Submission Form

Close Bidding Form: This form allows administrator to close bidding for a particular

product.

Figure 4.16: Close Bidding Form

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4.3 REPORT GENERATION

Several reports are generated from the system for the purpose of hardcopy records.

Some of the output are as follows:

Bidders’ List Report: This page displays the list of all registered bidders

Figure 4.17: Bidders’ List Report

Sellers’ List Report: This page displays the list of all registered bidders

Figure 4.18: Sellers’ List Report

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Product List Report: This page displays the list of all registered products

Figure 4.19: Product List Report

Bidding Report: This page displays records of bidding

Figure 4.20: Bidding Report

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CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATION

5.1 Summary

An Auction is a market institution with an explicit set of rules determining resource

allocation and prices on the basis of bids from the market participants. It could be

used for items or products acquisition (procurement) or products or goods disposal.

There are various forms of conducting auction, each with its own merits and

demerits. No one is perfectly okay when considering their advantages and

disadvantages. An online Hybrid Auction system using English auction and First-

Price Sealed-bid format was developed to eliminate all the problems associated with

the existing methods and fortify their strengths. The system administrator would first

value the items to be auctioned and latter send text messages to all the members of

staff of the concerned organization. This would prompt the interested staff to register

online and bid for the product of their choice with the assurance that they would be

justly treated. Winner selection shall be automatically done without the influence of

anybody. Adequate securities were built into the system to prevent fraudsters. The

online hybrid auction website was built using WAMP (Windows, Apache, My SQL

and PHP) while the model was implemented using Visual Basic 6.0.

5.2 Conclusion

The researcher had extensively studied and reviewed the different works by other

reseachers on various types of auction formats particularly English auction and First-

Price sealed-bid auction formats. The strenghts and the weaknesses of both

70

auctions were identified. In order to profer solution to the identified problems, the

researcher came up with a system titled “Development of Online Hybrid Auction

Using English auction and First-Price Sealed-bid Formats”. Among the advantages

of the new system are: encouragement of more participants, effective and efficient

allocation of good(s), time saver, more revenue for auctioneer, efficient and effective

payment mechanism, e.t.c.

5.3 Recommendations

Due to the aforementioned advantages of this auction format, it is recommended

that this system should be adopted by the Federal Goverment, State Government

and Local Government for the purpose of selling Government properties to the

public.

Government paralstatals and private companies should also embrace this system for

the same purpose.

Other researchers can also work on this system to extend its capability especially on

aspect of procurement and payment mechnism.

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