USA Web's Internet auction list
Going... Going... Gone Agorics intro to auctions
Back to the syllabus
Based on : A case study of an on-line auction for the World Wide Web
Ingvar Tjostheim & Jan-Olav Eide
Based on NYU case, at http://kambil.stern.nyu.edu/teaching/cases/auction/flowers.html
A number of different methods exist to auction and value goods exchanged
between buyers and sellers. Below we provide a number of different auction
techniques for the purpose of discussion. These auction models were adapted
from Davis and Holt, Experimental Economics, Princeton University Press
(1993).
The Dutch Auction
In a Dutch auction, the auctioneer lowers the offer price sequentially until
a buyer agrees to pay the offer price. Often the prices are indicated by
a clock, which falls over a price scale until a buyer presses a button to
stop the clock. The first buyer to do this obtains a unit at the price in
effect at the time that the clock was stopped. The Dutch auction derives
its name from its extensive use in wholesale agricultural markets in Holland.
The following Java applet illustrates the Dutch Auction.
The English Auction
In the English auction, different potential buyers bid for a good or service,
sequentially increasing the offered price until only one active bidder remains.
This auction technique is commonly used for the sale of artwork and other
valuable objects.
Offer Auction
An offer auction is an institution in which sellers can make offers sequentially,
and buyers are able to accept any offer, but not to make any bids.
Bid Auction
A bid auction refers to the opposite case in which buyers can make bids
sequentially, but sellers can only indicate that a bid is accepted.
Other Auction Models:
Clearinghouse Auction
In the clearinghouse auction, buyers submit bids and sellers submit offers.
Once submitted, the bids are arrayed in descending order, from highest to
lowest, while the offers are arrayed in ascending order, from lowest to
highest. A price is then determined by a crossing of the bid and offer arrays.
This two-sided institution eliminates the performance asymmetries associated
with allowing only one side of the market to submit price quotes. It is
perceived as a fair auction.
Posted-Offer Auction
In the posted-offer auction, sellers independently select a price and a
maximum quantity limit. After prices and quantity limits have been selected,
the prices are displayed on the blackboard or on all traders' computer screens.
Then buyers are chosen randomly from a waiting mode. The first buyer selected
makes purchases from sellers at their posted prices. When a buyer has purchased
all desired units, another is selected randomly and is given the same opportunity.
The trading period ends when all buyers have had an opportunity to shop
or when all sellers are out of stock. Then earnings are calculated, and
a new period typically follows.
Posted Bid Auction
Reversing the roles of sellers and buyers in a posted offer (i.e., allowing
buyers to post bids and subsequently selecting sellers in random order to
make sales decisions) implements the posted-bid auction.
Discriminative Auction
In a discriminative auction buyers submit posted bids to a single seller,
who offers a fixed number of units, N, to the highest bidders at their price.
For example, if two units are offered for sale and four bidders submit bids
of 15, 17, 10, and 9, then the first two bidders obtain the units at prices
of 15 and 17 respectively. This auction is called discriminative since winners
must pay their own bid prices, and in this sense the seller engages in "price
discrimination".
First-Price, Sealed-Bid Auction
When there is only one unit or "prize", the high bidder in the
discriminative auction wins the auction and purchases it at his/her bid
price, which is the highest, or "first" price. Therefore, a discriminative
auction with a single unit is sometimes called a first-price, sealed-bid
auction.
Competitive Sealed-Bid Auction
In contrast to the discriminative case, it is possible to design a mechanism
for selling multiple units in which all of the N highest (winning) bidders
pay a uniform price. When the uniform price is specified to be the highest
rejected bid, the institution is known as a competitive auction. In the
previous example, with two units and bids of 15, 17, 10, and 9, the first
two bidders obtain the units, but they pay the same (third) price, 10. Since
all winning bidders pay the same market-clearing price, this institution
can create an impression of fairness.
Second-Price, Sealed-Bid Auction
A second-price auction is a special case of a competitive sealed-bid auction
with only one prize; the highest rejected bid is the second highest price,
which is what the winning bidder must pay.
Decentralized Negotiation
In a decentralized negotiation institution, each seller (buyer) is allowed
to roam freely around the room and negotiate contracts. Each seller (buyer)
had one unit that could be sold (purchased) with a cost (reservation value)
listed on a card. After a contract is completed, the buyer and seller report
the price to a central point, and the price is usually written on the blackboard
at the time it is reported. The most striking result of the decentralized
negotiation is the tendency for quantity exchanged to be too high. While
centralized bid and offer information would tend to eliminate trades involving
extra-marginal units, the absence of information on the bid-ask spread in
decentralized markets would facilitate the consummation of more inefficient
contracts.
Double Auction
Under double auction rules, any buyer who makes a bid must raise his/her
hand and be recognized. The bid is then publicly announced to the market.
Sellers' offers are also publicly announced. All bids and offers are written
on the blackboard as they are made. Only the most attractive bid or offer
has "standing" or can be accepted. Any buyer is free at any time
to accept a standing offer, and any seller can accept a standing bid. It
is common practice to add an "improvement rule"; that is, that
a new bid be greater than the standing bid and that a new offer be lower
than the standing offer. This is a double auction in a sense that bids rise
and offers fall at the same time.