E-Auction and Price Discovery
Price discovery of natural resources is a complex process altogether and requires stringent methodology. The price of natural resources is, to a large extent, determined by the demand and supply factors of that particular resource. The spot price i.e., the market price of a resource at any particular instant is basically the point where the market demand curves and its supply curve meet. Even if great attempt is put in obtaining a more precise demand or supply curve, the spot price can never be perfectly determined by such completely theoretical considerations.
Apart from the factors of demand and supply, it is also the competitiveness of the market and the availability of buyers and sellers that has to be taken into account to arrive at the price of natural resource. It is this factor that can not be so easily ascertained and so it necessitates some practical method of price determination to be adopted.
E-Auctioning of natural resources is one such method which can be used to determine the prices of natural resources with a great amount of precision. The seller (government agencies in case of natural resources) can set a particular reserve price threshold, which is basically a rough minimum evaluation of the resource. Depending on the competitive market and the demand of the resource, the bid price can go higher and higher and thus give an estimate of the market valuation of the resource. At times the seller may not estimate the value of the resource correctly, but the e-auction ensures that the competitiveness in the market is well reflected in the price and resources are finally sold with maximum profit.
E-auctions have been employed with exceptional success for sale of natural resources by government agencies in India. E-auctions of coal mines, ore fields, real estate and telecom spectrum have been taking place and have brought a remarkable increase in the government exchequer. Of late, Phase 3 FM Auction commenced and have brought an unprecedented revenue to the government. The revenue that government has been able to produce from the auction of FM frequencies is more than twice the reserve price value and this clearly visualizes the significance that e-auction has in the process of price discovery.