Chapter 5
Auction
Introduction
Think about the following auction scenarios:
 In a pin-drop silence room full of well-dressed
audience, the auctioneer quickly pronounces a
starting price for the item in auction. …
 Imagine the chaotic floor of a stock exchange
where papers printed with numbers are scattered
all over the place. ….
 Imagine the very early morning of a Dutch flower
market, a clock whose dial is marked with price
scales is placed just behind the dock. ….
Introduction (Cont…)
In all the above scenarios, the bidders have to
prepare a next bid based on the current bid,
also known as counter bid.
 Another scenario where each bidder places
his/her bid in a sealed box. …
Classification of Auctions
The auctions can be grouped in several categories
depending on the bid submitted by buyer) or offer
(submitted by seller), dynamic nature of bid, etc.
The English Auction
The Dutch Auction
Bid Auction
Offer Auction
Seller Posted-Offer Auction
Double Auction
Classification of Auctions (Cont….)
Posted-Bid Auction
Clearing-house Auction
Discriminative Auction
First-Price Sealed-Bid Auction
Competitive Sealed-Bid Auction
Second-Price Sealed-Bid Auction (Vickery)
Decentralised Negotiation
The English Auction
In the English auction, the auctioneer sequentially increase the offer price to a
set of buyers. The auction is stopped until only one active bidder remains or
there is no response for a long time.
The auctioned item is soled to the bidder with the highest bid. Commonly used
for artwork and other valuable objects.
A bidder’s strategy is his/her series of bids as a function of:
1.
2.
3.
his/her valuation
His/her prior estimate to others’ valuations, and
The past bids of all the bidders.
In this type of open-outcry auctions, the bidding procedure is
important. The most common procedures are:
1.
2.
3.
For the auctioneer to raise prices at a constant rate,
For the auctioneer to raise prices at whatever rate he thinks is
appropriate,
For the bidders to raise prices as specified in the rules above.
The Dutch Auction
In a Dutch auction, the auctioneer lowers the offer price
sequentially until a buyer agrees to pay the offer by
shouting “mine” or pressing a button. Traditionally, the
prices are indicated on the dial of a clock.
In the Dutch auction, no relevant information is disclose in
the course of the auction.
If the buyer really wants an item, he/she cannot
afford to wait too long to enter his/her bid and is in
pressure to press early. This means he might bid at
or near his highest valuation and it normally goes
in favor of the seller.
Bid Auction
In a Bid auction, the buyers normally can make bids
sequentially, but sellers can only indicate that a bid is
accepted. This type of auction is known as Japanese
auction.
In this format, all the bids are offered by prospective
buyers at (almost) the same time using individual hand
signals for each monetary unit. In theory, all bidding
occurs at exactly the same moment, the in practice, it takes
several minutes to complete the cycle.
This form of bidding is extremely fast which is important
in the fresh food markets of Japan when time lost means
fish that cannot be sold.
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 bid.
This form of auction is practiced in the power
generation sector for electricity, related services,
and distribution services in the US. This allow the
customer to choose or not to choose the offer by
the utility supplier.
Seller Posted-Offer Auction
In the Posted-offer auction, sellers independently select a
price and a maximum quantity limit at the beginning of
each trading period. Once price and quantity limits have
been displayed on the blackboard or on all traders’
computer screen, buyers then proceed in random order to
purchase the quantity each desires.
In this auction model, sellers move fast by sending price
messages, buyers respond with quantity messages.
This auction model dominates almost all retail markets in
the US.
Double Auction
•
•
•
•
•
•
•
In the Double auction, the bids, offers, and trading
prices are public information.
Both the buyers and sellers are free to enter price quotes
into the market.
The a bid from the buyer is publicly announced to the
market.
Sellers’ offers are also publicly announced.
Any buyer (seller) is free to accept any sellers’ (buyers’)
quotation and from a binding contract.
This pricing institution characterizes the floor trading
on many organized stock and commodity exchanges
throughout the world.
This is a double auction in a sense that bids rise and
offers fall at the same time.
Posted-Bid Auction
•
•
•
In the posted-bid auction, the buyers posts their
bids and these are publicly displayed.
The sellers approaches in random order to make
sales decisions.
This situation is the reverse of the posted-offer
auction.
Clearing-house Auction
•
•
•
In the clearing-house auction, buyers submit bids and
sellers submit offers. The submitted bids are displayed
in ascending order and offers are displayed in
descending order.
The price of the auction item is selected by crossing the
two list.
The involvement of two-sided in pricing mechanism,
removes the performance asymmetries associated with
allowing only one side of the market to submit price
quotes.
Discriminative Auction
•
•
•
In a discriminative auction also known as Yankee
auction, one or more identical items are offered for sale
at the same time, buyers submit posted bids to a single
seller, who offers a fixed number of units, N, to the
bidders whose bids are among the N highest bids 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.
It is possible auction for items where charging buyers
different pricing is allowed.
First-Price Sealed-Bid Auction
•
•
•
•
The rule of first-price sealed-bid auction is that each
bidder submits one bid, in ignorance of the other bids.
When there is only one unit or “prize”, the bidder with
the highest bid in the discriminative auction wins the
item in the auction and purchases it at his/her bid price.
Therefore, a first-price sealed-bid auction is a
discriminative auction with single unit.
This auction is commonly deployed by the government
and large corporate body.
Competitive Sealed-Bid Auction
•
•
•
In contrast to the discriminative case, it is possible to
design a mechanism for selling multiple units in which
all bidders whose bids are among the N highest
(winning) bids pay a uniform price.
When the uniform price is specified to be the highest
rejected bid, the institution is known as a competitive
auction.
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, but they pay the same
(third) price, 10.
Second-Price Sealed-Bid Auction (Vickrey)
•
•
•
•
A second-price sealed-bid 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.
The second-price sealed-bid auctions are similar to the
English auctions. They are rarely used in reality.
The New Zealand spectrum auction uses Vickrey
auction.
A bidder who bids less is more likely to lose the auction,
but pays the same price if he does win.
Decentralized Negotiation
•
•
•
In an institution of the decentralized negotiation, each
seller (or buyer) is allowed to roam freely around the
room and negotiate contracts.
Each seller (or buyer) has one unit that could be sold (or
purchased) with a cost listed on a card.
After the 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.
Why Do We Need Auction?
Auction is actually a commerce tool used mainly in the
case where the price of a goods or service cannot be prejudged.
Traditionally, English auctions are carried out by the
different auction houses like: sotheby, christie, etc.
Multibillion dollar cut flower business over the world is
traded by flower auctions, which is a Dutch auction
type, in Holland, Canada and Japan.
Internet Auction: Mimic of Real-Time Open-Outcry
The flourishing web-based Internet leads to the openoutcry auction over the Internet.
The trend is so strong that the 255-year old traditional
auction house, Sotheby, has to open online auction at
the end of 1999.
Examples: e-Bay, Writerspace, MediProductys, etc.
Internet auctions now go over hundreds of auction sites
as listed in www.bidfind.com
Sealed-bid Auction Mechanisms
The auction of the open-outcry type requires instant
price determination for the valuation of the goods or
services in auction. The value of the item is determined
by the willingness of the bidder to pay for the stated
price for the item.
A solution of the problems can be accomplished through
a sealed-bid auction.
Sealed-bid auctions have been used in the radio
frequency spectrum auction for potentially profitable
applications by several Governments such as UK, USA,
New Zealand and Australia.
Auction Protocol
All Auctions practiced must be guided
by some sort of protocol. …
Web-based Auction
Can We Do web-based Auction now?
Web-based Auction
As Internet Auction becomes more popular,
payment, user rating along with different
auction variations also supported by the
auction site.
In case of payments of the auctioned items,
there is a service known as escrow service
with the following steps:
Web-based Auction(Cont…)
1. The auction site deposits the Buyer,s funds
into the escrow, and holds them there until
they are cleared.
2. The auction site normally notifies the
Seller once the payment has been remitted,
and authorizes the Seller to ship the sale
merchandise.
Web-based Auction(Cont…)
1. Once the goods has arrived, the Buyer has
a pre-agreed period to contact the auction
site in order to cancel or accept the
transaction.
2. Once the inspection period has expired,
the auction site releases the funds to the
Seller, less any commissions and fees due.
Can We Do web-based Auction now?
The online auction needs secured auction
sites to perform secured auction related
transactions. The first step is to setup auction
rules to perform the auction.
The person-to-person auction uses small
transactions per deal, but in the case of
business-to-business auction, it involves large
transaction at the same time surety on these
transactions.
General Components of an Online Auction
The general components of auctioning are :
Registration of buyers and bidders using secure
transaction.
Search facilities for auctioned items in the site.
Bid placement and processing
Winner declaration and deal processing
Transfer of auction items and collection of bid
Life cycle of an online auction
Figure: Online web-based auction
Auction Rules
The Auction rules are composed of two process,
1) Bidding process, and
2) Seller,s options.
The Bidding Process rules are:
i. Content of a bid: price and quantity.
ii. Bid Withdrawal: conditions
iii. Proxy bid: minimum bid increment on be half of bidder.
iv. Bid acceptance notification: information sent the buyers
and sellers.
v. Prior bid information: biding history
vi. Winner declaration: via e-mail, live socket
vii. Multiple bids: some auction sites do not allow submission
of multiple bids
viii.Payment rules: how the payment of the auctioned item
will be settled.
Auction Rules
The seller’s option’s are important in a web –based auction.
Some of the seller’s options commonly found in different
auction sites are:
i. Modification of offer or inventory
ii. Auction closing rules
iii. Condition for changing auction rules or withdrawal from
auction
iv. Rules for resolving tied bids
v. Complexity of bid evaluation.
What are The Necessary Tools?
Figure: Auction site’s navigation chart
What are The Necessary Tools? (Cont..)
Web-based auctions need the following tools along
with the auction web pages.
• Auction advertisement
• Tracking auction detail
• Invoice processing
What are the Major Challenges?
 Security and trust Issues
 Unlawful Conduct Issues
 Bidder Collusion
 Choice of Right Type of Auction
 Withdrawing Options for English Auction
 Agent-based Internet Auction
Thank You