Chapter 5

Auction

IntroductionThink 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 AuctionIn 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. his/her valuation2. His/her prior estimate to others’ valuations, and3. 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. For the auctioneer to raise prices at a constant rate,2. For the auctioneer to raise prices at whatever rate he thinks is

appropriate,3. For the bidders to raise prices as specified in the rules above.

The Dutch AuctionIn 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 AuctionIn 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 pre-judged.

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 open-outcry 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

Web-based Auction

Can We Do web-based Auction now?

All Auctions practiced must be guided by some sort of protocol. …

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

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

The general components of auctioning are :

Life cycle of an online auction

Figure: Online web-based auction

Auction RulesThe 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: conditionsiii. 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 historyvi. Winner declaration: via e-mail, live socketvii. Multiple bids: some auction sites do not allow submission

of multiple bidsviii.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 inventoryii. Auction closing rulesiii. Condition for changing auction rules or withdrawal from

auctioniv. Rules for resolving tied bidsv. 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