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An auction is a process of buying and selling goods or services by offering them up for bid, taking bids, and then selling the item to the winning bidder. In economic theory, an auction may refer to any mechanism or set of trading rules for exchange.

There are several variations on the basic auction form, including time limits, minimum or maximum limits on bid prices, and special rules for determining the winning bidder(s) and sale price(s). Participants in an auction may or may not know the identities or actions of other participants. Depending on the auction, bidders may participate in person or remotely through a variety of means, including telephone and the internet. The seller usually pays a commission to the auctioneer or auction company based on a percentage of the final sale price.

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Types of Auctions

English auction, also known as an open ascending price auction. This type of auction is arguably the most common form of auction in use today.[19] Participants bid openly against one another, with each subsequent bid higher than the previous bid.[20] An auctioneer may announce prices, bidders may call out their bids themselves (or have a proxy call out a bid on their behalf), or bids may be submitted electronically with the highest current bid publicly displayed.[20] In some cases a maximum bid might be left with the auctioneer, who may bid on behalf of the bidder according to the bidder's instructions.[20] The auction ends when no participant is willing to bid further, at which point the highest bidder pays their bid.[20] Alternatively, if the seller has set a minimum sale price in advance (the 'reserve' price) and the final bid does not reach that price the item remains unsold.[20] Sometimes the auctioneer sets a minimum amount by which the next bid must exceed the current highest bid.[20] The most significant distinguishing factor of this auction type is that the current highest bid is always available to potential bidders.[20] The English auction is commonly used for selling goods, most prominently antiques and artwork,[20] but also secondhand goods and real estate. At least two bidders are required.

Dutch auction also known as an open descending price auction.[21] 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.[20] The winning participant pays the last announced price.[22]

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.)[citation needed] In addition to cut flower sales in the Netherlands, Dutch auctions have also been used for perishable commodities such as fish and tobacco.[20] In practice, however, the Dutch auction is not widely used.[23]

Sealed first-price auction, also known as a first-price sealed-bid auction (FPSB). In this type of auction all bidders simultaneously submit sealed bids so that no bidder knows the bid of any other participant. The highest bidder pays the price they submitted.[24][20] This type of auction is distinct from the English auction, in that bidders can only submit one bid each. Furthermore, as bidders cannot see the bids of other participants they cannot adjust their own bids accordingly.[20] Sealed first-price auctions are commonly used in tendering, particularly for government contracts and auctions for mining leases.[20]

Vickrey auction, also known as a sealed-bid second-price auction.[25] This is identical to the sealed first-price auction except that the winning bidder pays the second highest bid rather than their own.[26] This is very similar to the proxy bidding system used by eBay, where the winner pays the second highest bid plus a bidding increment (e.g., 10%).[27] Although extremely important in auction theory, in practice Vickrey auctions are rarely used.[20]

Secondary types of auction

All-pay auction is an auction in which all bidders must pay their bids regardless of whether they win. The highest bidder wins the item. All-pay auctions are primarily of academic interest, and may be used to model lobbying/bribery (bids are political contributions) or competitions such as a running race.[28]
Buyout auction is an auction with a set price (the 'buyout' price) that any bidder can accept at any time during the auction, thereby immediately ending the auction and winning the item.[29] If no bidder chooses to utilize the buyout option before the end of bidding the highest bidder wins and pays their bid.[29] Buyout options can be either temporary or permanent.[29] In a temporary buyout auction the option to buy out the auction is no longer available after the first bid is placed.[29] In a permanent buyout auction the buyout option remains available throughout the entire auction until the close of bidding.[29] The buyout price can either remain the same throughout the entire auction, or vary throughout according to preset rules or simply at the whim of the seller.[29]

Combinatorial auction is any auction for the simultaneous sale of more than one item where bidders can place bids on an "all-or-nothing" basis on "packages" rather than just individual items. That is, a bidder can specify that he or she will pay for items A and B, but only if he or she gets both.[30] In combinatorial auctions determining the winning bidder can be a complex process where even the bidder with the highest individual bid is not guaranteed to win.[30] For example, in an auction with four items (W, X, Y and Z), if Bidder A offers $50 for items W & Y, Bidder B offers $30 for items W & X, Bidder C offers $5 for items X & Z and Bidder D offers $30 for items Y & Z, the winners will be Bidders B & D while Bidder A misses out because the combined bids of Bidders B & D is higher ($60) than for Bidders A and C ($55).

No-reserve auction (NR), also known as an absolute auction, is an auction in which the item for sale will be sold regardless of price.[31][32] From the seller's perspective, advertising an auction as having no reserve price can be desirable because it potentially attracts a greater number of bidders due to the possibility of a bargain.[31] If more bidders attend the auction a higher price might ultimately be achieved because of heightened competition from bidders.[32] This contrasts with a reserve auction, where the item for sale may not be sold if the final bid is not high enough to satisfy the seller. In practice, an auction advertised as "absolute" or "no-reserve" may nonetheless still not sell to the highest bidder on the day, for example, if the seller withdraws the item from the auction or extends the auction period indefinitely,[33] although these practices may be restricted by law in some jurisdictions or under the terms of sale available from the auctioneer.

Reserve auction is an auction where the item for sale may not be sold if the final bid is not high enough to satisfy the seller - that is, the seller reserves the right to accept or reject the highest bid.[32] In these cases a set 'reserve' price known to the auctioneer, but not necessarily to the bidders, may have been set in advance below which the item may not be sold.[31] A reserve auction is safer for the seller than a no-reserve auction as they are not required to accept a low bid, but this could potentially result in a lower final price than might otherwise be the case if this means that less interest is generated in the sale.[32]

Reverse auction is a type of auction in which the role of the buyer and seller are reversed, with the primary objective to drive purchase prices downward.[34] In an ordinary auction (also known as forward auction), buyers compete to obtain a good or service.[34] In a reverse auction, sellers compete to provide a good or service by offering progressively lower quotes until no supplier is willing to make a lower bid.[34]
Round robin auction is a variant of the English auction sometimes used to sell real estate.[citation needed] Potential buyers inspect the property, and then place bids before a certain deadline. Then each potential buyer is contacted by phone in a round robin fashion, told the highest bid to that point, and offered the chance to keep their previous bid, raise their bid, or drop out of the auction.[citation needed]

Silent auction is a variant of an English auction where bids are written on a sheet of paper. At the predetermined end of the auction the highest listed bidder wins the item.[35] This auction is often used in charity events, with many items auctioned simultaneously with a common finish time.[35] The auction is "silent" in that there is no auctioneer,[35] the bidders writing their bids on a bidding sheet often left on a table near the item.[36] Other variations of this type of auction may include sealed bids.[35] The highest bidder pays the price he or she submitted.[35]

Walrasian auction or Walrasian t√Ętonnement is an auction in which the auctioneer takes bids from both buyers and sellers in a market of multiple goods.[37] The auctioneer progressively either raises or drops the current proposed price depending on the bids of both buyers and sellers, the auction concluding when supply and demand exactly balance.[38] As a high price tends to dampen demand while a low price tends to increase demand, in theory there is a particular price point somewhere in the middle where supply and demand will match.[39]

Time requirements
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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.

Auctions: characterization
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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 may 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.


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