An auction is usually a process of buying and selling goods or services by offering them up for bids, taking bids, and then selling the item to the highest bidder or buying the item from the lowest bidder. Some exceptions to this definition exist and are described in the section about different types. The branch of economic theory dealing with auction types and participants' behavior in auctions is called auction theory.
An initial public offering (IPO) or stock launch is a public offering in which shares of a company are sold to institutional investors and usually also to retail (individual) investors. An IPO is typically underwritten by one or more investment banks, who also arrange for the shares to be listed on one or more stock exchanges. Through this process, colloquially known as floating, or going public, a privately held company is transformed into a public company. Initial public offerings can be used to raise new equity capital for companies, to monetize the investments of private shareholders such as company founders or private equity investors, and to enable easy trading of existing holdings or future capital raising by becoming publicly traded.
The winner's curse is a phenomenon that may occur in common value auctions, where all bidders have the same value for an item but receive different private signals about this value and wherein the winner is the bidder with the most optimistic evaluation of the asset and therefore will tend to overestimate and overpay. Accordingly, the winner will be "cursed" in one of two ways: either the winning bid will exceed the value of the auctioned asset making the winner worse off in absolute terms, or the value of the asset will be less than the bidder anticipated, so the bidder may garner a net gain but will be worse off than anticipated. However, an actual overpayment will generally occur only if the winner fails to account for the winner's curse when bidding.
An online auction is an auction held over the internet and accessed by internet connected devices. Similar to in-person auctions, online auctions come in a variety of types, with different bidding and selling rules.
A Vickrey auction or sealed-bid second-price auction (SBSPA) is a type of sealed-bid auction. Bidders submit written bids without knowing the bid of the other people in the auction. The highest bidder wins but the price paid is the second-highest bid. This type of auction is strategically similar to an English auction and gives bidders an incentive to bid their true value. The auction was first described academically by Columbia University professor William Vickrey in 1961 though it had been used by stamp collectors since 1893. In 1797 Johann Wolfgang von Goethe sold a manuscript using a sealed-bid, second-price auction.
An English auction is an open-outcry ascending dynamic auction. It proceeds as follows.
The linkage principle is a finding of auction theory. It states that auction houses have an incentive to pre-commit to revealing all available information about each lot, positive or negative. The linkage principle is seen in the art market with the tradition of auctioneers hiring art experts to examine each lot and pre-commit to provide a truthful estimate of its value.
Bid rigging is a fraudulent scheme in procurement auctions resulting in non-competitive bids and can be performed by corrupt officials, by firms in an orchestrated act of collusion, or between officials and firms. This form of collusion is illegal in most countries. It is a form of price fixing and market allocation, often practiced where contracts are determined by a call for bids, for example in the case of government construction contracts. The typical objective of bid rigging is to enable the "winning" party to obtain contracts at uncompetitive prices. The other parties are compensated in various ways, for example, by cash payments, or by being designated to be the "winning" bidder on other contracts, or by an arrangement where some parts of the successful bidder's contract will be subcontracted to them. In this way, they "share the spoils" among themselves. Bid rigging almost always results in economic harm to the agency which is seeking the bids, and to the public, who ultimately bear the costs as taxpayers or consumers.
A Japanese auction is a dynamic auction format. It proceeds in the following way.
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 day to several months from the opening bid to the final winning bid. With a well-designed auction, resources are allocated efficiently to the parties that value them the most, the government securing revenue in the process. Spectrum auctions are a step toward market-based spectrum management and privatization of public airwaves, and are a way for governments to allocate scarce resources.
A bidding fee auction, also called a penny auction, is a type of all-pay auction in which all participants must pay a non-refundable fee to place each small incremental bid. The auction is extended each time a new bid is placed, typically by 10 to 20 seconds. Once time expires without a new bid being placed, the last bidder wins the auction and pays the amount of that bid. The auctioneer profits from both the fees charged to place bids and the payment for the winning bid; these combined revenues frequently total more than the value of the item being sold. Empirical evidence suggests that revenues from these auctions exceeds theoretical predictions for rational agents. This has been credited to the sunk cost fallacy. Such auctions are typically held over the Internet, rather than in person.
Auction sniping is the practice, in a timed online auction, of placing a bid likely to exceed the current highest bid as late as possible—usually seconds before the end of the auction—giving other bidders no time to outbid the sniper. This can be done either manually or by software on the bidder's computer, or by an online sniping service.
Auction theory is an applied branch of economics which deals with how bidders act in auction markets and researches how the features of auction markets incentivise predictable outcomes. Auction theory is a tool used to inform the design of real-world auctions. Sellers use auction theory to raise higher revenues while allowing buyers to procure at a lower cost. The conference of the price between the buyer and seller is an economic equilibrium. Auction theorists design rules for auctions to address issues which can lead to market failure. The design of these rulesets encourages optimal bidding strategies among a variety of informational settings. The 2020 Nobel Prize for Economics was awarded to Paul R. Milgrom and Robert B. Wilson “for improvements to auction theory and inventions of new auction formats.”
A multiunit auction is an auction in which several homogeneous items are sold. The units can be sold each at the same price or at different prices.
A first-price sealed-bid auction (FPSBA) is a common type of auction. It is also known as blind auction. 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 that was submitted.
Bidding is an offer to set a price tag by an individual or business for a product or service or a demand that something be done. Bidding is used to determine the cost or value of something.
Auction software is application software, that can either be deployed on a desktop, on a web server or as a smart contract on a blockchain virtual machine. This software is used by auctioneers and participants of online auctions such as eBay. Smart contracts replace an auctioneer's server, if the auctioneer is not trusted.
A private electronic market (PEM) 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 and closed contract negotiations. The core idea of PEMs is to create competition among buyers/sellers while allowing buyers/sellers to adjust all those aspects of the deal that are typically only dealt with in a negotiation. This creates a problem of "comparing apples and oranges": bids may be quite different in many dimensions and therefore cannot easily be compared. Apart from the dimension of price these could include pre-negotiated discounts, specific qualities, combinations of goods and services with conditional pricing, freight differentials, contract fulfillment timing, payment terms, or deliberate constraints such as market share limits.
A reverse auction is a type of auction in which the traditional roles of buyer and seller are reversed. Thus, there is one buyer and many potential sellers. In an ordinary auction also known as a forward auction, buyers compete to obtain goods or services by offering increasingly higher prices. In contrast, in a reverse auction, the sellers compete to obtain business from the buyer and prices will typically decrease as the sellers underbid each other.
Alok Gupta is an American information scientist, economic engineer, and academic. He is the Professor of Information and Decision, a Senior Associate Dean of Faculty, Research and Administration, and Curtis L. Carlson School Wide Chair in Information Management in the Carlson School of Management at the University of Minnesota.
