Auction
Encyclopedia
An auction is a process of buying and selling
Trade
Trade is the transfer of ownership of goods and services from one person or entity to another. Trade is sometimes loosely called commerce or financial transaction or barter. A network that allows trade is called a market. The original form of trade was barter, the direct exchange of goods and...

 goods or services by offering them up for bid, taking bids, and then selling the item to the highest 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
Commission (remuneration)
The payment of commission as remuneration for services rendered or products sold is a common way to reward sales people. Payments often will be calculated on the basis of a percentage of the goods sold...

 to the auctioneer or auction company based on a percentage of the final sale price.

History of the auction

The word "auction" is derived from the Latin augeō which means "I increase" or "I augment".

For most of history, auctions have been a relatively uncommon way to negotiate the exchange of goods and commodities. In practice, both haggling and sale by set-price have been significantly more common. Indeed, prior to the seventeenth century the few auctions that were held were sporadic and infrequent.

Nonetheless, auctions have a long history, having been recorded as early as 500 B.C. According to Herodotus, in Babylon
Babylon
Babylon was an Akkadian city-state of ancient Mesopotamia, the remains of which are found in present-day Al Hillah, Babil Province, Iraq, about 85 kilometers south of Baghdad...

 auctions of women for marriage
Marriage
Marriage is a social union or legal contract between people that creates kinship. It is an institution in which interpersonal relationships, usually intimate and sexual, are acknowledged in a variety of ways, depending on the culture or subculture in which it is found...

 were held annually. The auctions began with the woman the auctioneer considered to be the most beautiful and progressed to the least. It was considered illegal to allow a daughter to be sold outside of the auction method.

During the Roman Empire
Roman Empire
The Roman Empire was the post-Republican period of the ancient Roman civilization, characterised by an autocratic form of government and large territorial holdings in Europe and around the Mediterranean....

, following military victory, Roman soldiers would often drive a spear into the ground around which the spoils of war were left, to be auctioned off. Later slaves, often captured as the "spoils of war", were auctioned in the forum under the sign of the spear, with the proceeds of sale going towards the war effort.

The Romans also used auctions to liquidate the assets of debtors whose property had been confiscated. For example, Marcus Aurelius sold household furniture to pay off debts, the sales lasting for months. One of the most significant historical auctions occurred in the year 193 A.D. when the entire Roman Empire was put on the auction block by the Praetorian Guard
Praetorian Guard
The Praetorian Guard was a force of bodyguards used by Roman Emperors. The title was already used during the Roman Republic for the guards of Roman generals, at least since the rise to prominence of the Scipio family around 275 BC...

. On March 23 The Praetorian Guard first killed emperor Pertinax
Pertinax
Pertinax , was Roman Emperor for three months in 193. He is known as the first emperor of the tumultuous Year of the Five Emperors. A high ranking military and Senatorial figure, he tried to restore discipline in the Praetorian Guards, whereupon they rebelled and killed him...

, then offered the empire to the highest bidder. Didius Julianus
Didius Julianus
Didius Julianus , was Roman Emperor for three months during the year 193. He ascended the throne after buying it from the Praetorian Guard, who had assassinated his predecessor Pertinax. This led to the Roman Civil War of 193–197...

 outbid everyone else for the price of 6,250 drachmas per Guard, an act that initiated a brief civil war. Didius was then beheaded
Decapitation
Decapitation is the separation of the head from the body. Beheading typically refers to the act of intentional decapitation, e.g., as a means of murder or execution; it may be accomplished, for example, with an axe, sword, knife, wire, or by other more sophisticated means such as a guillotine...

 two months later when Septimius Severus
Septimius Severus
Septimius Severus , also known as Severus, was Roman Emperor from 193 to 211. Severus was born in Leptis Magna in the province of Africa. As a young man he advanced through the customary succession of offices under the reigns of Marcus Aurelius and Commodus. Severus seized power after the death of...

 conquered Rome.

From the end of the Roman Empire to the eighteenth century auctions lost favor in Europe, while they had never been widespread in Asia.

In some parts of England during the seventeenth and eighteenth centuries auction by candle was used for the sale of goods and leaseholds. This auction began by lighting a candle after which bids were offered in ascending order until the candle spluttered out. The high bid at the time the candle extinguished itself won the auction.

The oldest auction house in the world is Stockholm Auction House
Stockholm Auction House
Stockholms Auktionsverk , founded in 1674 in Sweden, is the world's oldest auction house.Several times each year at the Nybrogatan showrooms in central Stockholm, high quality items are sold by auctions requiring about 90 seconds per item...

 (Stockholms Auktionsverk). It was established in Sweden in 1674.

During the end of the 18th century, soon after the French Revolution
French Revolution
The French Revolution , sometimes distinguished as the 'Great French Revolution' , was a period of radical social and political upheaval in France and Europe. The absolute monarchy that had ruled France for centuries collapsed in three years...

, auctions came to be held in taverns and coffeehouses to sell art. Such auctions were held daily, and catalogs were printed to announce available items. Such Auction catalog
Auction catalog
An auction catalog or auction catalogue is a catalogue that lists items to be sold at an auction which is written and made available well before the auction date...

s are frequently printed and distributed before auctions of rare or collectible items. In some cases these catalogs were elaborate works of art themselves, containing considerable detail about the items being auctioned.


Sotheby's
Sotheby's
Sotheby's is the world's fourth oldest auction house in continuous operation.-History:The oldest auction house in operation is the Stockholms Auktionsverk founded in 1674, the second oldest is Göteborgs Auktionsverk founded in 1681 and third oldest being founded in 1731, all Swedish...

, now the world's second-largest auction house, held its first auction in 1744. Christie's
Christie's
Christie's is an art business and a fine arts auction house.- History :The official company literature states that founder James Christie conducted the first sale in London, England, on 5 December 1766, and the earliest auction catalogue the company retains is from December 1766...

, now the world's largest auction house, was established around 1766. Other early auction houses that are still in operation include
Dorotheum
Dorotheum
The Dorotheum, established in 1707, is one of the world's oldest auction houses. It has its headquarters in Vienna on the Dorotheergasse and is the largest auction house in both Continental and German-speaking Europe. Besides auctions, the retail sector also plays a major role in Dorotheum's...

 (1707), Bonhams
Bonhams
Bonhams is a privately owned British auction house founded in 1793. It is the third largest auctioneer after Sotheby's and Christie's, and conducts around 700 auctions per year. It has 700 employees....

 (1793), Phillips de Pury & Company
Phillips de Pury & Company
Phillips de Pury & Company is an auction house and art dealership, with offices in London, New York, Geneva, Berlin, Brussels, Los Angeles, Milan, Munich and Paris. Phillips conducts auctions in New York, London and Geneva in the areas of Contemporary Art, Photography, 20-21st Century Design, Art...

 (1796), Freeman's (1805) and Lyon & Turnbull
Lyon & Turnbull
Lyon & Turnbull is a privately owned international auction house based in Scotland. Founded in 1826, it is Scotland’s oldest auction house; the largest independent auction house in the United Kingdom outside of London and one of the fastest growing auction houses in the UK.The firm has its...

 (1826).

During the American civil war
American Civil War
The American Civil War was a civil war fought in the United States of America. In response to the election of Abraham Lincoln as President of the United States, 11 southern slave states declared their secession from the United States and formed the Confederate States of America ; the other 25...

 goods seized by armies were sold at auction by the Colonel
Colonel
Colonel , abbreviated Col or COL, is a military rank of a senior commissioned officer. It or a corresponding rank exists in most armies and in many air forces; the naval equivalent rank is generally "Captain". It is also used in some police forces and other paramilitary rank structures...

 of the division. Thus, some of today's auctioneers in the U.S. carry the unofficial title of "colonel".
The development of the internet, however, has led to a significant rise in the use of auctions as auctioneers can solicit bids via the internet from a wide range of buyers in a much wider range of commodities than was previously practical.

In 2008, the National Auctioneers Association reported that the gross revenue of the auction industry for that year was approximately $268.4 billion, with the fastest growing sectors being agricultural, machinery, and equipment auctions and residential real estate auctions.

Primary types of auction

  • English auction
    English auction
    An English auction is a type of auction, whose most typical form is the "open outcry" auction. The auctioneer opens the auction by announcing a Suggested Opening Bid, a starting price or reserve for the item on sale and then accepts increasingly higher bids from the floor consisting of buyers with...

    , also known as an open ascending price auction. This type of auction is arguably the most common form of auction in use today. Participants bid openly against one another, with each subsequent bid higher than the previous bid. 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. 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. The auction ends when no participant is willing to bid further, at which point the highest bidder pays their bid. 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. Sometimes the auctioneer sets a minimum amount by which the next bid must exceed the current highest bid. The most significant distinguishing factor of this auction type is that the current highest bid is always available to potential bidders. The English auction is commonly used for selling goods, most prominently antiques and artwork, but also secondhand goods and real estate
    Real estate
    In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...

    . At least two bidders are required.
  • Dutch auction
    Dutch auction
    A Dutch auction is a type of auction where 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 reserve price is reached. The winning participant pays the last announced price...

    also known as an open descending price 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. The winning participant pays the last announced price. The Dutch auction is named for its best known example, the Dutch tulip
    Tulip
    The tulip is a perennial, bulbous plant with showy flowers in the genus Tulipa, which comprises 109 species and belongs to the family Liliaceae. The genus's native range extends from as far west as Southern Europe, North Africa, Anatolia, and Iran to the Northwest of China. The tulip's centre of...

     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.) In addition to cut flower sales in the Netherlands
    Netherlands
    The Netherlands is a constituent country of the Kingdom of the Netherlands, located mainly in North-West Europe and with several islands in the Caribbean. Mainland Netherlands borders the North Sea to the north and west, Belgium to the south, and Germany to the east, and shares maritime borders...

    , Dutch auctions have also been used for perishable commodities such as fish and tobacco. In practice, however, the Dutch auction is not widely used.
  • Sealed first-price auction
    Sealed first-price auction
    A first-price sealed-bid auction is a form of auction where bidders submit one bid in a concealed fashion. The submitted bids are then compared and the person with the highest bid wins the award, and pays the amount of his bid to the seller...

    , 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. 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. This kind of bid produces the same outcome as Dutch auction
    Dutch auction
    A Dutch auction is a type of auction where 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 reserve price is reached. The winning participant pays the last announced price...

    . Sealed first-price auctions are commonly used in tendering, particularly for government contracts and auctions for mining leases.
  • Vickrey auction
    Vickrey auction
    A Vickrey auction is a type of sealed-bid auction, where bidders submit written bids without knowing the bid of the other people in the auction, and in which the highest bidder wins, but the price paid is the second-highest bid. The auction was created by William Vickrey...

    , also known as a sealed-bid second-price auction. This is identical to the sealed first-price auction except that the winning bidder pays the second highest bid rather than his or her own. This is very similar to the proxy bid
    Proxy bid
    Proxy bidding is an implementation of an English second-price auction used on eBay, in which the winning bidder pays the price of the second-highest bid plus a defined increment. It differs from a Vickrey auction in that bids are not sealed; the "current highest bid" is always displayed...

    ding system used by eBay
    EBay
    eBay Inc. is an American internet consumer-to-consumer corporation that manages eBay.com, an online auction and shopping website in which people and businesses buy and sell a broad variety of goods and services worldwide...

    , where the winner pays the second highest bid plus a bidding increment (e.g., 10%). Although extremely important in auction theory, in practice Vickrey auctions are rarely used.


Multi-unit auctions sell more than one identical item at the same time, rather than having separate auctions for each. This type can be further classified as a uniform price auction
Uniform price auction
A uniform price auction is a multiunit auction in which a fixed number of identical units of a commodity are sold for the same price. Each bidder in the auction bids a price and a quantity. The price bid is considered the maximum price they are willing to pay per item, and the quantity is the...

 or a discriminatory price auction.

Secondary types of auction

  • All-pay auction
    All-pay auction
    In economics and game theory an all-pay auction, is an auction in which all bidders must pay regardless of whether they win the prize, which is awarded to the highest bidder as in a conventional 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.
  • Bidding fee auction
    Bidding fee auction
    A bidding fee auction, also called a penny auction, is a type of all-pay auction in which participants must pay a non-refundable fee to place a small incremental bid. When time expires, the last participant to have placed a bid wins the item and also pays the final bid price, which is purportedly...

    , also known as a penny auction, requires that each participant must purchase bids prior to placing them. When an auction's time expires, the last bidder wins the item and must pay a final bid price. An example of this type of auction is Madbid.
  • 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. If no bidder chooses to utilize the buyout option before the end of bidding the highest bidder wins and pays their bid. Buyout options can be either temporary or permanent. In a temporary-buyout auction the option to buy out the auction is not available after the first bid is placed. In a permanent-buyout auction the buyout option remains available throughout the entire auction until the close of bidding. The buyout price can either remain the same throughout the entire auction, or vary throughout according to rules or simply at the whim of the seller.
  • Combinatorial auction
    Combinatorial auction
    A combinatorial auction is a type of smart market in which participants can place bids on combinations of discrete items, or “packages,” rather than just individual items or continuous quantities....

    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. In combinatorial auctions, determining the winning bidder(s) can be a complex process where even the bidder with the highest individual bid is not guaranteed to win. 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).
  • Generalized second-price auction
    Generalized second-price auction
    The generalized second-price auction is a non-truthful auction mechanism for multiple items. First thought of as a natural extension of the Vickrey auction, it actually doesn't conserve some good properties of the Vickrey auction . It is used mainly in the context of keyword auctions, where...

  • Japanese auction is a variation of the English auction. When the bidding starts no new bidders can join, and each bidder must continue to bid each round or drop out. It has similarities to the ante in Poker
    Poker
    Poker is a family of card games that share betting rules and usually hand rankings. Poker games differ in how the cards are dealt, how hands may be formed, whether the high or low hand wins the pot in a showdown , limits on bet sizes, and how many rounds of betting are allowed.In most modern poker...

    .
  • Lloyd's syndicate auction. See http://www.lloyds.com/Lloyds_Market/Capacity/Capacity_auctions/Auction_process.htm.
  • (NR), also known as an absolute auction, is an auction in which the item for sale will be sold regardless of price. From the seller's perspective, advertising an auction as having no reserve price
    Reservation price
    In microeconomics, the reservation price is the highest price a buyer is willing to pay for goods or a service; or; the smallest price at which a seller is willing to sell a good or service...

     can be desirable because it potentially attracts a greater number of bidders due to the possibility of a bargain. If more bidders attend the auction, a higher price might ultimately be achieved because of heightened competition from bidders. 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, 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. In these cases a set 'reserve' price known to the auctioneer, but not necessarily to the bidders, may have been set, below which the item may not be sold. The reserve price may be fixed or discretionary. In the latter case, the decision to accept a bid is deferred to the auctioneer, who may accept a bid that is marginally below it. 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 result in a lower final price if less interest is generated in the sale.
  • Reverse auction
    Reverse auction
    A reverse auction is a type of auction in which the roles of buyers and sellers are reversed. In an ordinary auction , buyers compete to obtain a good or service, and the price typically increases over time...

    is a type of auction in which the roles of the buyer and the seller are reversed, with the primary objective to drive purchase prices downward. While ordinary auctions provide suppliers the opportunity to find the best price among interested buyers, reverse auctions give buyers a chance to find the lowest-price supplier. During a reverse auction, suppliers may submit multiple offers, usually as a response to competing suppliers’ offers, bidding down the price of a good or service to the lowest price they are willing to receive. By revealing the competing bids in real time to every participating supplier, reverse auctions promote “information transparency”. This, coupled with the dynamic bidding process, improves the chances of reaching the fair market value of the item.
  • Silent auction is a variant of the English auction in which bids are written on a sheet of paper. At the predetermined end of the auction, the highest listed bidder wins the item. This auction is often used in charity
    Charitable organization
    A charitable organization is a type of non-profit organization . It differs from other types of NPOs in that it centers on philanthropic goals A charitable organization is a type of non-profit organization (NPO). It differs from other types of NPOs in that it centers on philanthropic goals A...

     events, with many items auctioned simultaneously and "closed" at a common finish time. The auction is "silent" in that there is no auctioneer selling individual items, the bidders writing their bids on a bidding sheet often left on a table near the item. At charity auctions, bid sheets usually have a fixed starting amount, predetermined bid increments, and a "guaranteed bid" amount which works the same as a "buy now" amount. Other variations of this type of auction may include sealed bids. The highest bidder pays the price he or she submitted.
  • Senior auction is a variation on the all-pay auction, and has a defined loser in addition to the winner. The top two bidders must pay their full final bid amounts, and only the highest wins the auction. The intent is to make the high bidders bid above their upper limits. In the final rounds of bidding, when the current losing party has hit their maximum bid, they are encouraged to bid over their maximum (seen as a small loss) to avoid losing their maximum bid with no return (a very large loss).
  • Top-Up auction is a variation on the all-pay auction, primarily used for charity events. Bidders must pay the difference between their bid and the next lowest bid, whether they win or not. Only the winning bidder does not have to pay the "top-up" fee, but does have to pay for the item.
  • Walrasian auction
    Walrasian auction
    A Walrasian auction, introduced by Leon Walras, is a type of simultaneous auction where each agent calculates its demand for the good at every possible price and submits this to an auctioneer. The price is then set so that the total demand across all agents equals the total amount of the good...

    or Walrasian tâtonnement is an auction in which the auctioneer takes bids from both buyers and sellers in a market of multiple goods. 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. As a high price tends to dampen demand while a low price tends to increase demand, in theory there is a particular price somewhere in the middle where supply and demand will match.
  • Auction by the candle. A type of auction, used in England for selling ships, in which the highest bid laid on the table when a guttering candle expires wins.
  • Other auctions: Other auction types also exist such as Simultaneous Ascending Auction, Anglo-Dutch auction, Private value auction, Common value auction
    Common value auction
    A common value auction is a term in economics used to describe an environment in which information about the value of the object for sale is dispersed among bidders. The term is used in different ways by different people. By one definition it describes an auction in which the good being auctioned...


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.

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
    Double auction
    A double auction is a process of buying and selling goods when potential buyers submit their bids and potential sellers simultaneously submit their ask prices to an auctioneer, and then an auctioneer chooses some price p that clears the market: all the sellers who asked less than p sell and all...

     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
Reservation price
In microeconomics, the reservation price is the highest price a buyer is willing to pay for goods or a service; or; the smallest price at which a seller is willing to sell a good or service...

 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
Reservation price
In microeconomics, the reservation price is the highest price a buyer is willing to pay for goods or a service; or; the smallest price at which a seller is willing to sell a good or service...

(or reserve), with the item sold to the highest bidder.
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Common uses for auctions

Auctions are publicly and privately seen in several contexts and almost anything can be sold at auction. Some typical auction arenas include the following:
  • The antique
    Antiques
    An antique is an old collectible item. It is collected or desirable because of its age , beauty, rarity, condition, utility, personal emotional connection, and/or other unique features...

     business, where besides being an opportunity for trade
    Trade
    Trade is the transfer of ownership of goods and services from one person or entity to another. Trade is sometimes loosely called commerce or financial transaction or barter. A network that allows trade is called a market. The original form of trade was barter, the direct exchange of goods and...

     they also serve as social occasions and entertainment
  • In the sale of collectible
    Collectible
    A collectable or collectible is any object regarded as being of value or interest to a collector . There are numerous types of collectables and terms to denote those types. An antique is a collectable that is old...

    s such as stamps, coins, classic cars, fine art and luxury real estate
    Luxury real estate
    Luxury real estate is the real estate market niche targeted at the highest socio-economic group of consumers. -Definition:The characteristics that define luxury real estate differ among countries...

  • The wine auction business, where serious collectors can gain access to rare bottles and mature vintages, not typically available through retail channels
  • In the sale of all types of real property
    Real property
    In English Common Law, real property, real estate, realty, or immovable property is any subset of land that has been legally defined and the improvements to it made by human efforts: any buildings, machinery, wells, dams, ponds, mines, canals, roads, various property rights, and so forth...

     including residential and commercial real estate
    Real estate
    In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...

    , farms, vacant lots and land.
  • For the sale of consumer second-hand goods of all kinds, particularly farm (equipment) and house clearances and online auctions.
  • Sale of industrial machinery, both surplus or through insolvency.
  • In commodities
    Commodity
    In economics, a commodity is the generic term for any marketable item produced to satisfy wants or needs. Economic commodities comprise goods and services....

     auctions, like the fish wholesale auctions
  • In livestock
    Livestock
    Livestock refers to one or more domesticated animals raised in an agricultural setting to produce commodities such as food, fiber and labor. The term "livestock" as used in this article does not include poultry or farmed fish; however the inclusion of these, especially poultry, within the meaning...

     auctions where sheep, cattle, pigs and other livestock are sold. Sometimes very large numbers of stock are auctioned, such as the regular sales of 50,000 or more sheep during a day in New South Wales
    New South Wales
    New South Wales is a state of :Australia, located in the east of the country. It is bordered by Queensland, Victoria and South Australia to the north, south and west respectively. To the east, the state is bordered by the Tasman Sea, which forms part of the Pacific Ocean. New South Wales...

    .
  • In wool
    Wool
    Wool is the textile fiber obtained from sheep and certain other animals, including cashmere from goats, mohair from goats, qiviut from muskoxen, vicuña, alpaca, camel from animals in the camel family, and angora from rabbits....

     auctions where international agents purchase lots of wool
  • Thoroughbred
    Thoroughbred
    The Thoroughbred is a horse breed best known for its use in horse racing. Although the word thoroughbred is sometimes used to refer to any breed of purebred horse, it technically refers only to the Thoroughbred breed...

     horses, where yearling horses and other bloodstock are auctioned.
  • In legal contexts where forced
    Force (law)
    In the field of law, the word force has two main meanings: unlawful violence and lawful compulsion. "Forced entry" is an expression falling under the category of unlawful violence; "in force" or "forced sale" would be examples of expressions in the category of lawful compulsion.When something is...

     auctions occur, as when one's farm or house is sold at auction on the courthouse
    Courthouse
    A courthouse is a building that is home to a local court of law and often the regional county government as well, although this is not the case in some larger cities. The term is common in North America. In most other English speaking countries, buildings which house courts of law are simply...

     steps.
  • Travel tickets. One example is SJ AB
    SJ AB
    SJ is a government-owned passenger train operator in Sweden. SJ was created in 2000, out of the public transport division of Statens Järnvägar, when the former government agency was divided into six separate government-owned limited companies.-Overview:SJ's operations fall broadly into subsidised...

     in Sweden auctioning surplus at Tradera (Swedish eBay).
  • Holidays. A variety of holidays are available for sale online particularly via eBay. Vacation rentals appear to be most common. Many holiday auction websites have launched but failed.


Although less publicly visible, the most economically important auctions are the commodities auctions in which the bidders are business
Business
A business is an organization engaged in the trade of goods, services, or both to consumers. Businesses are predominant in capitalist economies, where most of them are privately owned and administered to earn profit to increase the wealth of their owners. Businesses may also be not-for-profit...

es even up to corporation
Corporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...

 level. Examples of this type of auction include:
  • Sales of businesses
  • Spectrum auction
    Spectrum auction
    A spectrum auction is a process whereby a government uses an auction system to sell the rights to transmit signals over specific bands of the electromagnetic spectrum and to assign scarce spectrum resources. Depending on the specific auction format used, a spectrum auction can last from a single...

    s, in which companies purchase licenses to use portions of the electromagnetic spectrum
    Electromagnetic spectrum
    The electromagnetic spectrum is the range of all possible frequencies of electromagnetic radiation. The "electromagnetic spectrum" of an object is the characteristic distribution of electromagnetic radiation emitted or absorbed by that particular object....

     for communications (e.g., mobile phone networks)
  • Private electronic market
    Private electronic market
    A private electronic market uses the Internet to connect a limited number or pre-qualified buyers or sellers in one market. PEMs are a hybrid between perfectly open markets A private electronic market (PEM) uses the Internet to connect a limited number or pre-qualified buyers or sellers in one...

    s using combinatorial auction techniques to continuously sell commodities (coal, iron ore, grain, water...) to a pre-qualified group of buyers (based on price and non-price factors)
  • Timber
    Timber
    Timber may refer to:* Timber, a term common in the United Kingdom and Australia for wood materials * Timber, Oregon, an unincorporated community in the U.S...

     auctions, in which companies purchase licenses to log on government land
  • Timber allocation auctions, in which companies purchase timber directly from the government Forest Auctions
  • Electricity auctions, in which large-scale generators and consumers of electricity bid on generating contracts
  • Environmental auctions, in which companies bid for licenses to avoid being required to decrease their environmental impact. These include auctions in emissions trading
    Emissions trading
    Emissions trading is a market-based approach used to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants....

     schemes.
  • Debt
    Debt
    A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...

     auctions, in which governments sell debt instruments
    Financial instruments
    A financial instrument is a tradable asset of any kind, either cash; evidence of an ownership interest in an entity; or a contractual right to receive, or deliver, cash or another financial instrument....

    , such as bonds
    Bond (finance)
    In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...

    , to investors. The auction is usually sealed and the uniform price paid by the investors is typically the best non-winning bid. In most cases, investors can also place so called non-competitive bids, which indicates an interest to purchase the debt instrument
    Financial instruments
    A financial instrument is a tradable asset of any kind, either cash; evidence of an ownership interest in an entity; or a contractual right to receive, or deliver, cash or another financial instrument....

     at the resulting price, whatever it may be
  • Auto auctions, in which car dealers purchase used vehicles to retail to the public.

Bid shading

Bid shading
Bid shading
In an auction, bid shading describes the practice of a bidder placing a bid that is below what they believe a good is worth.Bid shading is used for one of two purposes. In a common value auction with incomplete information, bid shading is used to compensate for the winner's curse...

 is placing a bid which is below the bidder's actual value for the item. Such a strategy risks losing the auction, but has the possibility of winning at a low price. Bid shading can also be a strategy to avoid the Winner's curse
Winner's curse
The winner's curse is a phenomenon akin to a Pyrrhic victory that occurs in common value auctions with incomplete information. In short, the winner's curse says that in such an auction, the winner will tend to overpay...

.

Chandelier or Rafter Bidding

A practice, especially by high-end art auctioneers, of raising false bids at crucial times in the bidding process in order to create the appearance of greater demand or to extend bidding momentum for a work on offer. To call out these nonexistent bids, auctioneers might fix their gaze at a point in the auction room that is difficult for the audience to pin down.

In the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...

, this practice is legal on property auctions up to but not including the reserve price, and is also known as off-the-wall bidding.

Collusion

Whenever bidders at an auction are aware of the identity of the other bidders there is a risk that they will form a "ring" and thus manipulate the auction result, a practice known as collusion
Collusion
Collusion is an agreement between two or more persons, sometimes illegal and therefore secretive, to limit open competition by deceiving, misleading, or defrauding others of their legal rights, or to obtain an objective forbidden by law typically by defrauding or gaining an unfair advantage...

. By agreeing to bid only against outsiders, never against members of the "ring", competition becomes weaker, which may dramatically affect the final price level. After the end of the official auction an unofficial auction will take place among the "ring" members. The difference in price between the two auctions will then be split among the members.

A ring can also be used to increase the price of an auction lot, in which the owner of the object being auctioned may increase competition by taking part in the bidding him or herself, but drop out of the bidding just before the final bid. In Britain and many other countries Rings and the bidding on one's own object are illegal. This form of a ring was used as a central plot device in an episode of the British television series Lovejoy
Lovejoy
Lovejoy is a TV series about the adventures of Lovejoy, a British antiques dealer and faker based in East Anglia, a less than scrupulous yet likeable rogue. The episodes were based on a series of picaresque novels by John Grant...

 (series 4, episode 3) in which the price of a watercolour by the (fictional) Jessie Webb is inflated in order that others by the same artist can be sold for more than their purchase price.

In an English auction a dummy bid is a bid made by a dummy bidder acting in collusion with the auctioneer or vendor, designed to deceive genuine bidders into paying more. In a First price auction a dummy bid is an unfavourable bid designed so as not to become the winning bid. (The bidder does not want to win this auction, but he or she wants to make sure to be invited to the next auction).

In Australia a dummy bid (shill
Shill
A shill, plant or stooge is a person who helps a person or organization without disclosing that he or she has a close relationship with that person or organization...

, schill) is a criminal offence but a vendor bid or a co-owner bid below the reserve price is permitted, if clearly declared as such by the auctioneer. These are all official legal terms in Australia, but may have other meanings elsewhere. A co-owner is one of two or several owners (who disagree among themselves).

In Sweden and many other countries there are no legal restrictions, but it will severely hurt the reputation of an auction house that knowingly permits any other bids except genuine bids. If the reserve is not reached this should be clearly declared.

Suggested opening bid (SOB)

There will usually an estimate of what price the lot will fetch. In an ascending open auction it is considered important to get 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. This is due to the increase in the number of bidders attracted by the low SOB. When 50 bidders compete, the winning bid will be about twice as high as when only two bidders compete. Sometimes with an English auction
English auction
An English auction is a type of auction, whose most typical form is the "open outcry" auction. The auctioneer opens the auction by announcing a Suggested Opening Bid, a starting price or reserve for the item on sale and then accepts increasingly higher bids from the floor consisting of buyers with...

 there will be more than 50 bidders.

A chi-squared distribution shows many low bids but few high bids. Bids "show up together"; without several low bids there will not be any high bids.

Another approach to choosing an SOB: The auctioneer may achieve good success by asking the expected final sales price for the item, as this method suggests to the potential buyers the item's particular value. For instance, say an auctioneer is about to sell a $1,000 car at a sale. Instead of asking $100, hoping to entice wide interest (for who wouldn't want a $1,000 car for $100?), the auctioneer may suggest an opening bid of $1,000; although the first bidder may begin bidding at a mere $100, the final bid may more likely approach $1,000.

Auction terminology

  • Appraisal
    Appraisal
    Economic appraisal is a type of decision method applied to a project, programme or policy that takes into account a wide range of costs and benefits, denominated in monetary terms or for which a monetary equivalent can be estimated. Economic Appraisal is a key tool for achieving value for money and...

  • Auction block
  • Bidding
    Bidding
    Bidding is an offer of setting a price one is willing to pay for something. A price offer is called a bid. The term may be used in context of auctions, stock exchange, card games, or real estate transactions....

  • Buyer's premium
    Buyer's Premium
    In auctions, the buyer's premium is a percentage additional charge on the hammer price of the lot. It is made by the auctioneer to cover 'administrative expenses'....

     - fee
    Fee
    A fee is the price one pays as remuneration for services. Fees usually allow for overhead, wages, costs, and markup.Traditionally, professionals in Great Britain received a fee in contradistinction to a payment, salary, or wage, and would often use guineas rather than pounds as units of account...

     paid by the buyer to the auction house
  • Buyout price
  • Commission
    Commission (remuneration)
    The payment of commission as remuneration for services rendered or products sold is a common way to reward sales people. Payments often will be calculated on the basis of a percentage of the goods sold...

  • Consignee
    Consignee
    In a contract of carriage, the consignee is the person to whom the shipment is to be delivered to whether by land, sea or air.-A brief statement of law:...

  • Consignor
    Consignor
    The consignor, in a contract of carriage, is the person sending a shipment to be delivered whether by land, sea or air. Some carriers, such as national postal entities, use the term "sender" or "shipper" but in the event of a legal dispute the proper and technical term "consignor" will generally be...

  • Dummy bid
  • CMD (Caution Money Deposit)
  • Dynamic closing
  • EMD (Earnest Money Deposit)
  • Escrow
    Escrow
    An escrow is:* an arrangement made under contractual provisions between transacting parties, whereby an independent trusted third party receives and disburses money and/or documents for the transacting parties, with the timing of such disbursement by the third party dependent on the fulfillment of...

  • Hammer price - nominal price at which a lot is sold; on top the buyer pays buyer's premium and taxes
  • Increment
    Increment
    An increment is an increase of some amount, either fixed or variable. For example one's salary may have a fixed annual increment or one based on a percentage of its current value...

  • Job lot
  • Knocked down to
  • Lot
  • Minimum bid
  • No reserve
  • Outbid
  • Opening bid
  • Proxy bid (aka absentee bid)
  • Registration deposit
  • Relisting
  • Reserve price
  • Sniping
    Auction sniping
    Auction sniping is the process, in a timed online auction , of placing a winning bid at the last possible moment , giving the other bidders no time to outbid the sniper. This can be done manually, or by software...

  • Vendor
  • Vendor bid

JEL classification

The Journal of Economic Literature
Journal of Economic Literature
The Journal of Economic Literature is a peer-reviewed academic journal on economy published by the American Economic Association. It was established in 1963 as the Journal of Economic Abstracts. As a review journal, it mainly features essays and reviews of recent economic theories...

 (JEL) classification code
JEL classification codes
Articles in economics journals are usually classified according to the JEL classification codes, a system originated by the Journal of Economic Literature. The JEL is published quarterly by the American Economic Association and contains survey articles and information on recently published books...

 for auctions is D44.

See also

  • Types of auction:
    • Art sale
      Art sale
      An art auction is the sale of art works, in most cases in an auction house.In England this dates from the latter part of the 17th century, when in most cases the names of the auctioneers were suppressed...

    • Auto auctions
      Auto auctions
      Auto auctions are a method of selling new, and most often, used vehicles based on auction system. Auto auctions can be found in most nations, but are often unknown to most people. This is, such as in the case of the United States, because this a protected source for used car dealers...

    • Car dealer auctions
    • Chinese auction
      Chinese auction
      A Chinese auction is a combination of a raffle and an auction that is typically featured at charity, church festival and numerous other events. Can also be known as penny social, tricky tray or pick-a-prize according to local custom, or to avoid any reference to nationality.The difference between...

    • Estate sale
      Estate sale
      An estate sale or estate liquidation is a sale or auction to dispose of a substantial portion of the materials owned by a person who is recently deceased or who must dispose of his personal property to facilitate a move.-Reasons for an estate sale:...

    • Bidding fee auction
      Bidding fee auction
      A bidding fee auction, also called a penny auction, is a type of all-pay auction in which participants must pay a non-refundable fee to place a small incremental bid. When time expires, the last participant to have placed a bid wins the item and also pays the final bid price, which is purportedly...


  • Other topics:
    • Tendering
    • Auction school
      Auction school
      Auction School refers to an institution or course of study that prepares one to practice auctioneering or trains one to become an auctioneer. Many U.S. states require that an individual attend an approved auction school in order to practice auctioneering within that state...

    • Auction theory
      Auction theory
      Auction theory is an applied branch of economics which deals with how people act in auction markets and researches the properties of auction markets. There are many possible designs for an auction and typical issues studied by auction theorists include the efficiency of a given auction design,...

    • Auction chant
      Auction chant
      Auction chant is a rhythmic repetition of numbers and "filler words" spoken by an auctioneer in the process of conducting an auction. The auction chant is a repetition of two numbers at a time which indicate the monetary amount involved with the sale of an item...

    • Auction Network
      Auction Network
      Auction Network is a 24-hour Internet and cable television channel that allows viewers to participate remotely in auctions taking place throughout the world...

    • Auction sniping
      Auction sniping
      Auction sniping is the process, in a timed online auction , of placing a winning bid at the last possible moment , giving the other bidders no time to outbid the sniper. This can be done manually, or by software...

    • Dollar auction
      Dollar auction
      The dollar auction is a non-zero sum sequential game designed by economist Martin Shubik to illustrate a paradox brought about by traditional rational choice theory in which players with perfect information in the game are compelled to make an ultimately irrational decision based completely on a...

    • eBay
      EBay
      eBay Inc. is an American internet consumer-to-consumer corporation that manages eBay.com, an online auction and shopping website in which people and businesses buy and sell a broad variety of goods and services worldwide...

    • Foreclosure
      Foreclosure
      Foreclosure is the legal process by which a mortgage lender , or other lien holder, obtains a termination of a mortgage borrower 's equitable right of redemption, either by court order or by operation of law...

    • Game theory
      Game theory
      Game theory is a mathematical method for analyzing calculated circumstances, such as in games, where a person’s success is based upon the choices of others...

    • Online auction tools
      Online auction tools
      Online Auction tools is application software, that can either be deployed on a Web server or a Desktop. This software is used by customers of online auctions such as eBay or Oztion....

    • Online auction business model
      Online auction business model
      The online auction business model is one in which participants bid for products and services over the Internet. The functionality of buying and selling in an auction format is made possible through auction software which regulates the various processes involved.Several types of online auctions are...


Further reading

Draft edition available online.
  • http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1727409
The source of this article is wikipedia, the free encyclopedia.  The text of this article is licensed under the GFDL.
 
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