What is an auction

An auction is the process of buying and selling things by offering them up for bid, taking bids, and then selling the item to the highest bidder. In economic theory an auction is a method for determining the value of a commodity that has an undetermined or variable price. In some cases, there is a minimum or reserve price; if the bidding does not reach the minimum, there is no sale (but the person who puts the item up for auction still owes a fee to the auctioneer). In the context of auctions, a bid is an offered price.

Auctions are publicly seen in several contexts: in the antique business, where besides being an opportunity for trade they also serve as social occasions and entertainment; in the sale of collectibles such as stamps, coins, classic cars, and fine art; in thoroughbred horseracing, where yearling horses are commonly auctioned off; and in legal contexts where forced auctions occur, as when one’s farm or house is sold at auction on the courthouse steps.

Although less publicly visible, the most economically important auctions are those in which the bidders are businesses or corporations. Examples of this type of auction include:

spectrum auctions, in which companies purchase licenses to use portions of the electromagnetic spectrum for communications (for cell phone networks, for example.)

timber auctions, in which companies purchase licenses to log on government land.

electricity auctions, in which large-scale generators and consumers of electricity bid on generating contracts.

environmental auctions, in which companies bid for licenses to avoid being required to decrease their environmental impact.

debt auctions, in which governments sell debt instruments, such as bonds, to investors. The auction is usually sealed and the uniform price paid by the investors is typically the best non-winning bid. In most cases, investors can also place so called non-competitive bids which indicates an interest to purchase the debt instrument at the resulting price, whatever it may be.

Internet auctions, dominated by the wildly successful eBay, have become very popular.

The world’s two largest auction houses are Christie’s and Sotheby’s. The world’s largest online auction site is eBay.

Auction catalogs are frequently printed and distributed before auctions of rare and/or collectible items; these catalogs may be very elaborate works, with considerable details about the items being auctioned.

Auctioneers are usually trained in the legal and practical aspects of conducting auctions. Some jusisdictions require auctioneers to be licensed and bonded. Auctioneers who have completed Auctioneer School commonly use the title Colonel and are given this honorary title because in the U.S. Civil War, Colonels of the armies were called upon to auction off the spoils of war.

Types of Auctions are

English auction: This is what most people think of as an auction. Participants bid openly against one another, with each bid being higher than the previous bid. The auction ends when no participant is willing to bid further, or when a pre-determined “buy-out” price is reached, at which point the highest bidder pays the price. The seller may set a ‘reserve’ price and if the auctioneer fails to raise a bid higher than this reserve the sale may not go ahead.

Dutch auction: 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, or a predetermined minimum price is reached. That participant pays the last announced price. This type of auction is convenient when it is important to auction goods quickly, since a sale never requires more than one bid. The Dutch auction is named for its best known example, the Dutch tulip auctions; in the Netherlands this type of auction is actually known as a “Chinese auction”. “Dutch auction” is also sometimes used to describe online auctions where several identical goods are sold simultaneously to an equal number of high bidders. Economists call the latter auction a multi-unit English ascending auction.

Sealed first-price auction: Also known as Sealed High-Bid Auction or First-Price Sealed-Bid Auction (FPSB). In this type of auction all bidders simultaneously submit bids so that no bidder knows the bid of any other participant. The highest bidder pays the price they submitted.
Sealed second-price auction, also known as a Vickrey auction: This is identical to the sealed first-price auction, except the winning bidder pays the second highest bid rather than their own. In theory, this is mathematically equivalent to the English auction, because in both the first-place bidder receives the item at a price equal to the second-place bidder’s willingness to pay, modulo the bid increment. True strategic equivalence requires a modified model of the English ascending auction in which the price rises continuously with bidders choosing when to drop out. When all but one bidder drops out, the good is allocated to the remaining bidder at the price at which the second-to-last bidder dropped out.

Silent auction: This is a sealed variant often used in charity events, but involving the simultaneous sale of multiple items. Participants submit bids normally on paper, near the item. They may or may not know how many other people are bidding or what their bids are. The highest bidder pays the price they submitted.

Procurement auction: This kind of auction reverses the roles of seller and buyer. The buyer puts out an RFQ for a given commodity and providers offer progressively lower prices in hopes of getting the business. At the end of the auction, the lowest bid wins.

Digital art auction: In this indefinitely long auction, designed for unreleased works that are trivially reproducible at zero cost (recordings, software, drug formulae), bidders openly submit their maximum bids (which may be adjusted or withdrawn at any time). The seller may review the bids and close with a price of their choosing at any time—the successful bidders that pay this price are those whose bid meets or exceeds it, and these are the only bidders who receive a copy of the item.

Open outcry auction: This type of auction is used in stock exchanges and commodity exchanges, where trading occurs on a trading floor and traders may enter verbal bids and offers simultaneously. Transactions may take place simultaneously at different places in the trading pit or ring. This type of auction is being replaced by electronic trading platforms.

If more than one identical item is sold, there are two possible generalizations of the second-price auction. In a uniform-price auction, all of the winning bidders pay the price submitted by the highest non-winning bidder. Bidders will not typically bid their true value in a uniform-price auction with multiple units. In a Vickrey auction, the pricing rule is more complicated, but preserves the property that bidders will bid their true valuation. It is also possible to auction each identical item individually. Once each item has been priced, the winning bidder is entitled to buy the remaining goods at the same price. Items the winning bidder opts not to purchase are auctioned again. This system creates a tension between the desire to hold back on bidding since later items will almost certainly be cheaper, and the chance that by losing the first round of bidding all possibility of purchasing will be lost.
Bidders in the traditional Dutch auction and sealed first-price auction will tend to underbid what they believe the item is truly worth in hopes of getting the item for less, or in order to avoid the winner’s curse. This behavior is known as bid shading. These two auctions are also theoretically equivalent, but in practice Dutch auctions will produce less revenue than sealed first-price auctions (one of the important results of Experimental economics).

Auction Definition:

Auction: (noun) “a sale by increase of bids,” 1595, from L. auctionem. “an increasing sale,” from aug-, stem of augere “to increase,” from PIE base *aug- “to increase”. In northern England and Scotland, called a roup. The verb is attested from 1807. In the U.S., something is sold at auction; in England, by auction.

Auction Terminology:

* Silent Auction: This is often a variant of an English auction, where bids are written on a sheet of paper, and at the predetermined end of the auction, the highest listed bidder wins the prize. This auction variant is often used in charity events, and many items may be auctioned simultaneously. Participants submit bids normally on paper, near the item. Other variations of this type of auction may include sealed bids. The highest bidder pays the price he or she submitted.

* Digital Art Auction: In this indefinitely long auction, designed for unreleased works that are trivially reproducible at zero cost (recordings, software, drug formulas), bidders openly submit their maximum bids (which may be adjusted or withdrawn at any time). The seller may review the bids and close with a price of their choosing at any time—the successful bidders that pay this price are those whose bid meets or exceeds it, and these are the only bidders who receive a copy of the item.

* Open Outcry Auction: This type of auction can refer to any auction where the auction is conducted orally for people to hear. This type of auction also refers to what is used in stock exchanges and commodity exchanges, where trading occurs on a trading floor and traders may enter verbal bids and offers simultaneously. Transactions may take place simultaneously at different places in the trading pit or ring. This type of auction is being replaced by electronic trading platforms.

* Unique Bid Auction: In this type of auction users post blind bids and are given a range of prices they can place a bid in, often a capped limit. The highest, or lowest, unique bid wins. For instance an auction is given a maximum bid of 10. If the top five bids are 10, 10, 9, 8, 8 then 9 would be the winner being the highest unique bid. This a popular online type of auction.

* Buy-Out Auction: This auction has a predetermined buy-out price in which the bidder can end the auction by accepting the buy-out price. The buy-out price is set by the seller. The bidder can choose to bid or use the buy-out option. If no bidder chooses to utilize the buy-out option, the auction ends with the highest bidder winning the auction.

* Combinatorial Auction: A combinatorial auction is an auction in which bidders can place bids on combinations of items, or “packages,” rather than just individual items.

* Absolute Auction: also known as an Unreserved Auction, No-reserve Auction or Auction Without Reserve, is an auction with no minimum bid amount, no set starting bid, no seller confirmation of the high bid price, and no buyback’s of the property being offered by the seller of any agents of the seller. The highest bidder will purchase the property no matter the high bid price. This type of auction is designed to attract the maximum participation from the buying public as the seller has committed to convey their property to the highest bidder without limitation. It does offer buyers excellent opportunities from time to time, however. A 2003 Virginia statute defines an absolute auction as “an auction where at the time of the auction sale the real or personal property to be sold will pass to the highest bidder regardless of the amount of the highest and last bid.”

In terms of security/privacy, there are two main types of auctions:

* In a Private Auction the identities of the bidders are hidden, so anyone that buys the item can remain anonymous. This is normally done for either security reasons such as rare gems or art, or to avoid embarrassment if the item is more risque.

* In a Public Auction, the bidders’ identities are not hidden and anyone is welcome to attend the auction.

In terms of auctioneers and auction items, we can differentiate three types of auctions:

* Exchange Auction - also known as commodity auctions or exchange-commodity auctions, are the most closed to the new participants. The participants include a number of core professional buyers, who monitor each other to ensure that no one is ‘cheating’ on the community
* Sale Auction - for art and one-of-a-kind items
* Dealer Auction - for collectibles, cars or machinery

If more than one identical item is sold, there are two possible generalizations of the second-price auction. In a uniform-price auction, all of the winning bidders pay the price submitted by the highest non-winning bidder. Bidders will not typically bid their true value in a uniform-price auction with multiple units. In a Vickrey (or second-price sealed-bid) auction, the pricing rule is more complicated, but preserves the property that bidders will bid their true valuation. It is also possible to auction each identical item individually. Once each item has been priced, the winning bidder is entitled to buy the remaining goods at the same price. Items the winning bidder opts not to purchase are auctioned again. This system creates a tension between the desire to hold back on bidding since later items will almost certainly be cheaper, and the chance that by losing the first round of bidding all possibility of purchasing will be lost.