Lecture 5 Notes – Procurement, Electronic Auctions & Crowdsourcing

Course Context and Lecture Position

Lecture 5 in the course “Digitale Unternehmung” (Summer Term 2025, Prof. Dr. Martin Spann, LMU-Munich)
Positioned between
- VL 3 & VL 4 – Digital Transformation & Open Innovation
- VL 6 – Online-Marketing
- VL 7 – Business Intelligence
- VL 8 – Business Processes
- VL 9 & VL 10 – Agile & Value-Creation Structures, IT Environment
Today’s focus: Procurement, Electronic Auctions, Crowdsourcing (incl. Crowd Work & Crowdfunding)

Chapter I – Electronic Procurement (Beschaffung)

Primary Objective

$\text{Cost reduction}$ is THE key motive.
- Electronic tools enable automation and transparency which translate into $\text{lower process costs}$ .
Secondary but complementary goals
- Automation of ordering workflows
- Higher transparency in spend & suppliers
- Efficient inventory management
- Shorter lead times (Durchlaufzeiten)
- Quality assurance
- Increased flexibility regarding suppliers & demand shocks

Challenge: Variants Diversity (Variantenvielfalt)

Causes
- Diverse customer requirements / market segments
- Trend toward individualisation & mass customisation
- Different target-group addressing strategies
- Continuous new developments & upgrades
- Legacy support obligations keep old variants alive
- Shift from seller- to buyer-dominated markets → higher competitive pressure
- “Creeping” generation of variants via ad-hoc decisions
Problems
- Rising R&D effort per product line
- Fragmentation of procurement markets; $\downarrow$ purchasing volumes → $\uparrow$ unit price
- Need for specialised parts & additional suppliers
- High administrative overhead & many clarification loops
- Process heterogeneity across variants (no scale effects)
- Contribution-margin dilution & cannibalisation risk
- Capital & resource lock-in across the value chain

Postponement Strategy

Core idea: shift the point where variety is introduced “as close as possible to the end-customer”.
Mass customisation at IKEA
- Flat-pack, standardised modules produced centrally
- Final assembly & personalisation postponed to customer’s home → variety realised after logistics → cost & complexity reduction upstream.

Chapter II – Price Discovery on Electronic Markets: Auction Mechanisms

Purchasing vs. Selling Auctions

Selling (Forward) Auction
- Single seller, many buyers → highest bid wins.
Purchasing (Reverse) Auction
- Single buyer, many sellers → lowest bid wins.
Classic formats
- English: ascending price, last bidder wins.
- Dutch: descending price, first “stop” wins.

Vickrey (Second-Price Sealed-Bid) Auctions in Procurement

Historical Background

Identified by William Vickrey (Nobel memorial 1996).
First documented use: 1870s stamp auctions (mail-in bids).
Modern use: government procurement, spectrum licences, etc.

Key Characteristics (in a reverse setting)

Fixed bidding window.
Each supplier submits one sealed, binding bid.
No bid revision possible.
Allocation: lowest bid wins; Payment: second-lowest bid.
Property: incentive compatibility ⇒ truthful bidding is a weakly dominant strategy.

Incentive Compatibility Example

Bidder	True Cost	1st-Price Outcome	Incentive to Deviate?	2nd-Price Outcome	Incentive to Deviate?
A	$12$	If bids $12$ → may win/pay $12$	Yes (could shade)	Truthful → pays $10$	No
B	$10$	—	—	—	—
C	$7$	Truthful → wins/pay $7$ but may shade	Yes	Wins/pay $10$ ; deviation raises no benefit	No
D	$14$	—	—	—	—

Deviations either do not improve profit or turn profit negative; hence truth-telling.

Generic Procedure

Buyer publishes tender.
Suppliers submit sealed bids simultaneously.
Buyer selects minimum bid.
Buyer pays the second-minimum bid.

Variant: Matrix Auction (Multi-Attribute / Combinatorial Vickrey)

Problem: Procurement often consists of multiple sub-tasks; economies of scope exist.
Steps
1. Tender lists each sub-task and allowed task-bundles.
2. Suppliers submit bids for every single task AND every bundle they wish to deliver.
3. Auctioneer builds a bid-matrix.
4. Determine cost-minimising allocation (can mix suppliers).
5. Pricing alternatives:
- Pricing-per-Column: pay second-lowest bid per column.
- Generalized Vickrey Auction (GVA): For each winning bidder $i$
  $Payment_i = \big(\text{Min-cost without }i\big) - \big(\text{Cost of other winners with }i\big)$
  → internalises bundle synergies (Verbundeffekte).
Road-bypass example (Corsten & Gössinger, 2001)
- Sub-tasks: “Fahrbahn”, “Radweg & Bürgersteig”, “Ampelschaltung”.
- Bidders: specialists vs. generalists.
- Optimal allocation combined bids B(1&3) + A(2) for total $\boxed{22\;GE}$ (Pricing-per-Column) or $\boxed{21\;GE}$ (GVA).
- Shows how allocation + pricing rules influence overall savings and incentive alignment.

Chapter III – Crowdsourcing

Core Concept & Definition

Coined by Jeff Howe (2006 / book 2008): Crowd + Outsourcing → task execution by an undefined, large group via open online call.
Applicable to innovation, routine operations, content generation, problem solving.
Leverages “Wisdom of the Crowd”; new digital value-creation logic.

Actors & Infrastructure

Crowdsourcer (Client): firm or organisation posting the task.
Crowdsourcees (Workers): heterogeneous crowd executing tasks.
Intermediary Platform: IT marketplace matching, routing, quality control.
- May be in-house or external SaaS.

Economic Foundations

Transaction-Cost View (Afuah & Tucci 2012)
- Firms choose governance forms that minimise $\text{TC}$ (search, contract, enforcement).
- Crowdsourcing is a hybrid between market & hierarchy.
- Works if tasks are well-specified and opportunism manageable.
Knowledge-Based View
- Knowledge is strategic asset; transfer normally easier internally.
- Crowdsourcing viable when knowledge is codifiable & decomposable into modular subtasks.

Crowd Work (Paid Micro-Freelancing)

IT-enabled reorganisation of labour processes; tasks outsourced to an internal/external crowd.
Characteristics (Durward et al. 2016)
- Monetary compensation primary; intrinsic motives secondary.
- Income may form significant share of worker’s livelihood.
- Often freelance/solo-self-employment; workload fluctuates.
Example: Testbirds
- 600k+ testers, 193 countries; crowdsourced software QA (bug-hunting, usability tests).

Technology Stack

Cloud databases for workers & clients
Matching layer pairs tasks with skilled crowdsourcees
Workflow engine orchestrates delivery & payments
Access via browsers/API; process data captured for analytics

Work-Form Typology (Leimeister & Zogaj 2013)

Wettbewerbsbasiert
- Independent submissions; best entry wins (e.g., logo contest).
Kollaborativ
- Crowd edits/extends others’ work; shared outcome (e.g., open-source).
Ergebnisorientiert
- Focus on output quality; prizes for top results.
Zeitorientiert (First-come-first-serve)
- Reward first satisfactory submission; important for real-time tasks (e.g., data labelling during events).

Worker Risks / Ethical Issues

“Work anytime, anywhere” ⇒ on-demand precariousness.
- No long-term employment, social security, or union representation.
- Income instability; project availability fluctuates.
- Currently limited legal protection for quasi-self-employed crowd workers (Schulte et al. 2020).

Crowdfunding (Schwarmfinanzierung)

Definition & Etymology

Financing of specific projects via many small contributions from a “crowd” of backers through an online platform.
Mixes crowd wisdom with capital allocation functions.

Motivations (Mollick & Kuppuswamy 2014)

Survey of Kickstarter creators
- $59\%$ : starting a new business
- $24\%$ : one-time project
- $17\%$ : launching a new product in existing business

Platform Economics

Backer  <-- $-- Platform --$ -->  Creator
   ↑                  ↑                 ↓
Gegenleistung ← Content / Campaign → Promise of reward

Two-sided market; platform extracts fee; success dependent on trust & visibility.

Crowdfunding Models (Industry Report 2013)

Donation-based (Crowddonating) – pure altruism.
Reward-based (Crowdsponsoring) – backer receives product/perk.
Lending-based (Crowdlending) – backer acts as creditor, expects interest.
Equity-based (Crowdinvesting) – backer receives shares/profit-participation.
- Market shares: $43\%$ lending, $29\%$ donation, $15\%$ equity, $13\%$ reward (2013 data).

Value for Start-ups (Mollick & Robb 2015)

Reduces three fundamental risks:
1. Capital risk – upfront cash via pre-sales.
2. Demand risk – campaign acts as market test.
3. Product-development risk – feedback loop with early adopters.
Democratise access to finance & innovation (egalitarian effect).
Example successes: ErgoDox EZ mechanical keyboard, smart yoga mat.

Key Take-Aways & Connections

Electronic procurement and crowdsourcing share a common digital infrastructure focus: platforms that reduce transaction costs by matching supply and demand at scale.
Auction design (e.g., Vickrey, GVA) seeks truthful revelation similar to how well-structured crowdsourcing tasks aim for efficient information aggregation.
Both domains illustrate the managerial need to balance efficiency gains with ethical/social considerations (e.g., variant complexity upstream; precarious labour downstream).
Linking back to prior lectures: Variant postponement & mass customisation build on earlier sessions on Digital Transformation & Open Innovation; auction mechanisms and BI analytics (next lecture) use data to optimise procurement & crowd interactions.

Lecture 5 Notes – Procurement, Electronic Auctions & Crowdsourcing

Course Context and Lecture Position

Chapter I – Electronic Procurement (Beschaffung)

Primary Objective

Challenge: Variants Diversity (Variantenvielfalt)

Postponement Strategy

Chapter II – Price Discovery on Electronic Markets: Auction Mechanisms

Purchasing vs. Selling Auctions

Vickrey (Second-Price Sealed-Bid) Auctions in Procurement

Historical Background

Key Characteristics (in a reverse setting)

Incentive Compatibility Example

Generic Procedure

Variant: Matrix Auction (Multi-Attribute / Combinatorial Vickrey)

Chapter III – Crowdsourcing

Core Concept & Definition

Actors & Infrastructure

Economic Foundations

Crowd Work (Paid Micro-Freelancing)

Technology Stack

Work-Form Typology (Leimeister & Zogaj 2013)

Worker Risks / Ethical Issues

Crowdfunding (Schwarmfinanzierung)

Definition & Etymology

Motivations (Mollick & Kuppuswamy 2014)

Platform Economics

Crowdfunding Models (Industry Report 2013)

Value for Start-ups (Mollick & Robb 2015)

Further Reading / Core Literature

Key Take-Aways & Connections