Auction Types - Auction Web

Chinese auction - raffle - a typical Neapolitan tombola.

JEL Classification

In the Journal of Economic Literature "Classification System" D stands for "Microeconomics" with division D4 for "Market Structure and Pricing" and subdivisions D44 for "Auctions" and D46 for "Value Theory". (C7 for "Game Theory" and C78 for "Bargaining Theory").

Auctions: Characterization

Auctions can differ in the number of participants:

In a supply (or reverse) auction, m sellers offer a good that a buyer requests.
In a demand auction, n buyers bid for a good being sold.
In a double auction n buyers bid to buy goods from m sellers.

Prices are bid (or offered) by buyers and asked by sellers. Auctions may also differ by the procedure for bidding (or asking, as the case may be):

In an open auction participants may repeatedly bid and are aware of each other's previous bids.
In a closed auction buyers and/or sellers submit sealed bids.

Auctions by differ as to the price at which the item is sold, whether the first (best) price, the second price, the first unique price or some other. Auctions may set a reservation price which is the least/maximum acceptable price for which a good may be sold/bought.

Without modification, auction generally refers to an open, demand auction, with or without a reservation price (or reserve), with the item sold to the highest bidder.

Primary types of auction

English auction: This is the type of auction commonly used by the English auction houses like Sotheby's, Christie's, and Phillips. 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 equal to or higher than the reserve, the item remains unsold. If there is no reserve price, the auction is called absolute.

In some cases, bids may be made absentee, by leaving them with the auctioneer, or by phone or by Internet (in which case live bids may also be visible online).

A variant popular in the time of Samuel Pepys was 'auction by candle' in which the winning (highest) bid was the last one to be made before a small piece of lit candle died out.

Such auctions can be vulnerable to collusion: Two or more bidders act together to win the auction. Following the auction result, the "loser" threatens to sue the winner, who then proposes a settlement. The settlement is actually the pre-agreed reward for the loser's cooperation. This strategy was described by the economist Susan Athey.

Chinese auction: Basically, a raffle.

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. The 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. This is very similar to the proxy bidding system used by eBay, where the winner pays the lesser of their actual bid and the second-highest bid plus one bidding increment.

All-pay auction: an auction in which all bidders must pay their bids regardless of whether they win the prize. The highest bidder wins the prize. The all-pay auction is often used to model lobbying (bids are political contributions), or other competitions.

All of the private value auctions listed above are revenue equivalent assuming complete information, meaning that they all result in the same expected revenue for a seller.

Mystery Auction

A mystery auction is a type of online auction where bidders vie for boxes or envelopes containing various items, usually on the hope that the items will be humorous, interesting, or valuable. In the early days of eBay's popularity, sellers began promoting boxes or packages of random and usually low-value items not worth selling by themselves.

Today, sellers conducting mystery auctions have expanded the practice to form a kind of pseudo raffle or lottery, in which buyers bid on numbered envelopes, "virtual" items or other non-valuable goods, usually connected to random amounts of cash, vouchers, and/or items of value. Often sellers promote the auction with promises to return the winning bid price to bidder's PayPal account, along with any additional cash "gifts."

These auctions are carefully worded to avoid violation of eBay's Terms of Service (ToS) which expressly forbids "giveaways, random drawings, raffles, prizes or bonuses." Mystery auctions conform to the ToS, because anything included in a package or returned to the buyer in addition to the featured item is considered a "gift" rather than a prize.

Motivations for promoting mystery auctions range from the need to liquidate many items of little value quickly to simply creating a humorous diversion for frequent eBay bidders. Cash prize auctions are generally considered a means by which sellers can boost feedback ratings and transaction counts.

Dubious semantics aside, eBay recognizes the value of this type of auction and has set up a dedicated area for Mystery Auctions in the "Everything Else" category.

Time requirements

Each type of auction has its specific qualities such as pricing accuracy and time required for preparing and conducting the auction. The number of simultaneous bidders is of critical importance. Open bidding during an extended period of time with many bidders will result in a final bid, that is very close to the true market value. Where there are few bidders and each bidder is allowed only one bid, time is saved, but the winning bid may not reflect the true market value with any degree of accuracy. Of special interest and importance during the actual auction is the time elapsed from the moment that the first bid is revealed to the moment that the final (winning) bid has become a binding agreement.

English auction (since 1674) is used for chattel (20 seconds), art, antiques (90 seconds) and (especially in Australia) for real estate (10 minutes). A valuation and/or a SOB Suggested Opening Bid is announced. At least two bidders are required.
Candle auction (since 1490) preceded English auction. (15 to 20 minutes).

Dutch auction (since 1887) is used for wholesale cut flowers, tobacco, farm products, fish and other perishables. (4 seconds).

First price auction (or sealed bids) (since 1770) is used for industrial real estate, building contract work and whenever only one or very few bidders are expected to participate. (1 second).

Swiss auction (since 1950) is used for building contract work, where the winning bid is subject to certain conditions. The bid is thus not immediately binding for the winning bidder. (5 days).

Second price auction (or Vickrey auction) (since 1961) is used for treasury bills. (1 second).

French auction (or Tatonnement or Walrasian auction) (since 1874) is used for gold, stocks and bonds. (4 to 20 seconds).

Swedish auction (or Swede auction) (since 1982) is used for various types of family homes. (10 days). (The General Services Administration GSA uses on-line auctions that are practically the same as Swedish auction. GSA is the United States government agency for the sale of surplus real estate).

Simplified Swedish auction (since 2002) is used for most family homes in Sweden's metropolitan areas. (4 days).

Asking price is not an auction. This pricing method emerged about 1200 B.C. for chattel in Iraq. It is still used for chattel, second-hand cars and real estate, especially outside the metropolitan areas. (Lasting one year in a business recession). In a rising market, what starts as an Asking Price, may eventually become an English Auction, if surprisingly many bidders show up.

Posted price is not an auction. This pricing method emerged about 2000 B.C. for real estate in Israel and was reintroduced in 1850 at new department stores in France. It is mostly used for mass-produced products such as food, new retail articles and newly-built real estate. (1 second). Since 1980 a barcode often instantly sets the price at the check-out counter.

SOB, Suggested Opening Bid

There will always be some kind of (rough) estimate as to what the object will fetch. In an ascending open auction it is considered important that there should be at least a 50 percent increase in the bids from start to finish. To accomplish this the auctioneer must start the auction by announcing a Suggested Opening Bid, SOB, that is low enough to be immediately accepted by one of the bidders. Once there is an Opening Bid there will quickly be several other higher bids submitted. Experienced auctioneers will often select an SOB that is about 45 percent of the (lowest) estimate. Thus there is a certain margin of safety to ensure that there will indeed be a lively auction with many bids submitted. Several observations indicate, that the lower the SOB, the higher the final winning bid will be. This is due to the increase in number of bidders attracted by the low SOB. When 50 bidders compete with each other the winning bid will be about twice as high as when only two bidders compete. Often with Swedish auction and sometimes with English auction there will be more than 50 bidders.