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Game Theory, Nobel Prize, & Auctions - Auction Primer
Series - Part 1
William Vickrey, highly regarded as the founder of auction
theory, was an economics professor at Columbia University when he
published two papers outlining his views on auctions:
"Counterspeculation, Auctions, and Competitive Sealed
Tenders", 1961, Journal of Finance
"Auction and Bidding Games", 1962, Recent Advances in Game
Theory
In 1996 he received a Nobel Prize "for fundamental
contributions to the economic theory of incentives under
asymmetric information." It's important to understand that
asymmetric information is an essential component of auctions,
where potential buyers have varying levels of knowledge about the
value of the item.
Although Vickrey considered his work on auctions as "one of my
digressions into abstract economics, at best of minor
significance in terms of human welfare", to those of us who work
with online auctions, much of what he outlined is useful to
understanding our marketplace.
Vickrey identified 4 general types of auctions:
English
Dutch
First-price sealed bid
Second-price sealed bid
English Auctions
The most common type of auction is the English Auction, although
it may also be known as an ascending price auction. In ascending
price auctions each subsequent bid is higher than the previous
one. This is the most popular type of auction for single
items.
Although traditional ascending price auctions use a "soft
close" format - where bidding continues until a final bid is
placed, the majority of today's on-line auction sites use the
"hard close" format - also known as a 'time interval" auction
having a set time limit, regardless of ongoing bidding. It's
important to note that in a "soft close" format, bid snipping,
that is bidding during the last few seconds or minutes on an
item, is eliminated since the auction stays open as long as bids
are being made.
In an attempt to minimize bid snipping and provide more of a
"soft close" characteristic to their "hard close" auctions, eBay
allows bidders to use "proxy bidding". In proxy bidding, a bidder
enters the highest price they are willing to pay for an item when
they first bid. The bid begins at the lowest possible level and
increases automatically only if their original lowest bid has
been beaten. For more in-depth information on the "proxy bidding
capability on eBay go here.
http://pages.eBay/help/buy/proxy-bidding.html
Amazon.com currently offers a feature for their auctions
called "Going, Going, Gone." The Going, Going, Gone" feature
extends the end of an auction for 10 minutes if a bid is placed
effectively creating a "soft close". For more information on the
"Going, Going, Gone" feature on Amazon go here.
http://www.amazon.com/exec/obidos/tg/browse/-/1161360/103-1666189-8415007#going-gone
From the buyers standpoint a "hard close" format is preferable
since they may be able to make a final bid before others can
react, possibly winning the auction at a lower price.
For sellers, a "soft close" format provides an opportunity to
realize the maximum price for an item by removing the time
restrictions for an auction. As long as bidders are bidding the
auction remains open.
Dutch Auctions
As you may have guessed, the concept of the Dutch auction
originates in the Netherlands. Unlike English auctions which
utilize ascending price methods, Dutch auctions are descending
price auctions and are commonly used when multiples of the same
items are to be auctioned. In a Dutch auction the bidding starts
at a relatively high price which is driven progressively downward
by bids.
As an example of a Dutch auction let's say you had 10 items
you wanted to sell for $20 each.
Bidder A bids $18 for 6 items
Bidder B bids $17 for 5 items
The final result is:
Bidder A would receive 6 items for $17 each
Bidder B would receive 4 items for $17 each
Please note that most Dutch auctions allow bidders to refuse
an order for a lesser number of items than what they bid on. A
"soft" or "hard close" format may be used in Dutch auctions
although the most common is the "hard close".
First-price Sealed Bid Auctions
Sealed bid auctions differ from the English and Dutch in as much
as the bids are not announced to other bidders. The individual
bid is only know to the bidder and the seller. This type of
auction may be either buyer-bid, where the highest bidder wins
the item and pays the amount of their bid, or seller-bid, where
the lowest bidder sells the item and is paid the amount of the
bid. This form of auction is common for construction contracting,
military procurement, foreign exchanges, and other types of
goods.
Second-price Sealed Bid Auctions
Another common name for second-price sealed bid auctions is
Vickrey auctions (named after William Vickrey) There is a slight
variation to the first-price auction for Vickery auctions. In a
buyer-bid auction the highest bidder buys the item and pays the
amount of the second highest bid. Or in a seller-bid auction, the
lowest bidder sells the item and is paid the amount of the second
lowest bid.
The above descriptions provide a general overview of the most
popular auction types in use today. Depending on the auction
website these general categories may include a number of
variations and options such as reserve pricing, open or closed
venue, multiple items, fixed price and lot listings to mention a
few. Before entering any particular type of auctions make sure
you study and understand the rules for that specific type of
auction, as the rules may vary from website to website.
Copyright © Steven Woodward - All Rights Reserved
Steven Woodward is the owner, editor and publisher of the
Auction Sellers Network (ASN); a web site for individuals and
companies who are serious about utilizing the online auction
marketplace for their business. In addition to topical articles,
ASN provides an extensive resource center, news feeds and member
forums. For more information, or to become a member, please visit
us at http://www.AuctionSellersNetwork.com
No permission is needed to reproduce an unedited copy of this
article as long the About the Author tag is left in tact and
included. We do request that we be informed of where it is posted
and reciprocal links will be considered.
 MORE RESOURCES updated Sat. July / 31 / 2010
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