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Auction

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Overview

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 theoretical terms, an auction is a method for determining the value of a good with an undetermined or variable price. Auctions can be with reserve or minimum, or without minimums, or absolute or no reserve. In reserve auctions, there is a minimum bid 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 may still owe a fee to the auctioneer or auction company). In absolute or no reserve auctions, the sale is guaranteed, with only the price left to be determined. In the context of auctions, a bid is an offered price. All of the private value auctions are revenue equivalent (no matter the type or format of the auction), in that they all result in the same expected revenue for a seller.

Types of auctions

English auction

An auction where the price increases. The 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 auction fails to have a bid higher than the reserve, the item remains unsold.

Chinese auction

An auction that is equivalent to a raffle.

Dutch auction

An auction where the price decreases. 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 winning participant pays the last announced price. The Dutch auction is named for its best known example, the 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. Economists call the latter auction a multi-unit English ascending auction.)

Sealed-bid 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-bid 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.

Variations of common types of auctions

Silent auction

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.

Open outcry auction

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

Auction where users post blind bids and are given a range of prices from 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

Auction with 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

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) An auction with no minimum bid amount, no set starting bid, no seller confirmation of the high bid price, and no buybacks 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.

Security and Privacy Terms

  • Private auction hides the identities of all bidders, 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.
  • Public auction displays the bidders' identities and therefore anyone is welcome to attend the auction.

Branches 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 is reserved for art and one-of-a-kind items.
  • Dealer auction is an auction for collectibles, cars or machinery.

Industries in which auctions are common

Auctions are publicly and privately seen in several contexts and almost anything can be sold at auction. Some typical auction arenas include the following:

  • Legal contexts: forced auctions occur, as when one's farm or house is sold at auction on the courthouse steps.
  • Antique business: provide an opportunity for trade and serve as social occasions and entertainment

in the sale of collectibles such as stamps, coins, classic cars, fine art, and luxury real estate.

  • Wine business: serious collectors can gain access to rare bottles and mature vintages, not typically available through retail channels.
  • Real property: residential and commercial real estate, farms, vacant lots and land
  • Second-hand goods: house clearances and online auctions, etc.
  • Commodities: example - fish wholesale auctions
  • Thoroughbred horseracing: yearling horses are commonly auctioned off

Although less publicly visible, the most economically important auctions are the commodities auctions in which the bidders are businesses even up to corporation level. Examples of this type of auction include:

  • Sales of businesses
  • Spectrum auctions: companies purchase licenses to use portions of the electromagnetic spectrum for communications
  • Timber auctions: companies purchase licenses to log on government land
  • Electricity auctions: large-scale generators and consumers of electricity bid on generating contracts
  • Environmental auctions: companies bid for licenses to avoid being required to decrease their environmental impact
  • Debt auctions: 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
  • Auto auctions: car dealers purchase used vehicles to retail to the public.

See Also

External links

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