• English auction: This is what most people think of as an auction. Participants bid openly against one another, with each bid being higher than the previous bid. The auction ends when no participant is willing to bid further, or when a pre-determined "buy-out" price is reached, at which point the highest bidder pays the price. The seller may set a 'reserve' price and if the auctioneer fails to raise a bid higher than this reserve the sale may not go ahead.

• Dutch 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, or a predetermined minimum price is reached. That participant pays the last announced price. This type of auction is convenient when it is important to auction goods quickly, since a sale never requires more than one bid. The Dutch auction is named for its best known example, the Dutch tulip auctions; in the Netherlands this type of auction is actually known as a "Chinese auction". "Dutch auction" is also sometimes used to describe online auctions where several identical goods are sold simultaneously to an equal number of high bidders. Economists call the latter auction a multi-unit English ascending auction.

• Sealed first-price auction: Also known as Sealed High-Bid Auction or First-Price Sealed-Bid Auction (FPSB). In this type of auction all bidders simultaneously submit bids so that no bidder knows the bid of any other participant. The highest bidder pays the price they submitted.

• Sealed second-price auction, also known as a Vickrey auction: This is identical to the sealed first-price auction, except the winning bidder pays the second highest bid rather than their own. In theory, this is mathematically equivalent to the English auction, because in both the first-place bidder receives the item at a price equal to the second-place bidder's willingness to pay, plus the bid increment. True strategic equivalence requires a modified model of the English ascending auction in which the price rises continuously with bidders choosing when to drop out. When all but one bidder drops out, the good is allocated to the remaining bidder at the price at which the second-to-last bidder dropped out. Implemented as such, this is known as a Japanese Auction.

• Silent auction: This is a sealed variant often used in charity events, but involving the simultaneous sale of multiple items. Participants submit bids normally on paper, near the item. They may or may not know how many other people are bidding or what their bids are. The highest bidder pays the price they submitted.

• Procurement auction: This kind of auction reverses the roles of seller and buyer. The buyer puts out an RFQ for a given commodity and providers offer progressively lower prices in hopes of getting the business. At the end of the auction, the lowest bid wins.

• Digital art auction: In this indefinitely long auction, designed for unreleased works that are trivially reproducible at zero cost (recordings, software, drug formulae), bidders openly submit their maximum bids (which may be adjusted or withdrawn at any time). The seller may review the bids and close with a price of their choosing at any time—the successful bidders that pay this price are those whose bid meets or exceeds it, and these are the only bidders who receive a copy of the item.

• Open outcry auction: This type of auction is used in stock exchanges and commodity exchanges, where trading occurs on a trading floor and traders may enter verbal bids and offers simultaneously. Transactions may take place simultaneously at different places in the trading pit or ring. This type of auction is being replaced by electronic trading platforms.

• Unique bid auction: In this type of auction users post blind bids and are given a range of prices they can place a bid in, often a capped limit. The highest, or lowest, unique bid wins. For instance an auction is given a maximum bid of 10. If the top five bids are 10, 10, 9, 8, 8 then 9 would be the winner being the highest unique bid. This a popular online type of auction.

• Buy-out auction: This auction has a predetermined buy-out price in which the bidder can end the auction by accepting the buy-out price. The buy-out price is set by the seller. The bidder can choose to bid or use the buy-out option. If no bidder chooses to utilize the buy-out option, the auction ends with the highest bidder winning the auction.

• Combinatorial Auction: In some cases, a buyer's value for the goods that are up for auction is a complex interaction of the type and number of goods he receives (known as a "bundle"). For instance, if bicycle wheels and bicycle frames are sold separately in an auction, a bidder may value a bundle consisting of a single wheel or a single frame at $0, but may value the bundle of two wheels and one frame at $200. If forced to purchase each component of a bundle in a separate auction, the bidder faces a dilemma: bidding enough to win the components of the bundle that are sold first may result in a financial loss if he fails to win the components that are sold later, but failing to purchase the components that are sold first ensures that he will not win the bundle. This dilemma can be overcome by selling all goods simultaneously and allowing buyers to submit bids on combinations of goods. Such combinatorial bids may offer to pay a certain amount if all units of a buyer-specified bundle are awarded, but nothing otherwise. They may also offer to purchase one bundle of goods or another, but not both. Sorting out which buyers win which bundles (and sometimes the amount they must pay for them) is usually computationally complex. This complexity is overcome by feeding the bids into an optimization algorithm (such as a linear programming problem).

If more than one identical item is sold, there are two possible generalizations of the second-price auction. In a uniform-price auction, all of the winning bidders pay the price submitted by the highest non-winning bidder. Bidders will not typically bid their true value in a uniform-price auction with multiple units. In a Vickrey auction, the pricing rule is more complicated, but preserves the property that bidders will bid their true valuation. It is also possible to auction each identical item individually. Once each item has been priced, the winning bidder is entitled to buy the remaining goods at the same price. Items the winning bidder opts not to purchase are auctioned again. This system creates a tension between the desire to hold back on bidding since later items will almost certainly be cheaper, and the chance that by losing the first round of bidding all possibility of purchasing will be lost.

Bidders in the traditional Dutch auction and sealed first-price auction will tend to underbid what they believe the item is truly worth in hopes of getting the item for less, or in order to avoid the winner's curse. This behavior is known as bid shading. These two auctions are also theoretically equivalent, but in practice Dutch auctions will produce less revenue than sealed first-price auctions (one of the important results of Experimental economics).

Work in the theory of auctions contributed to Vickrey's 1996 Bank of Sweden Prize.

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An auction catalog is a catalog that lists items to be sold at an auction. Auction catalogs for rare and expensive items, such as art, jewelry, postage stamps, and antique furniture, are of interest in and of themselves, for they will frequently include detailed descriptions of the items, their provenance, historical significance, photographs, and so forth. In some cases, auction catalogs are key documentation for rare objects that are in private collections, and make up an important part of the libraries of students and dealers of the rarities.

Each entry typically includes a "lot number" identifying each item uniquely, a detailed textual description, and either an estimated price, or a "reserve" price below which the item will not be sold. Photographs may appear with the entry, or grouped into a separate section of the catalog; for mass-produced items like postage stamps, the textual description may be considered sufficient.

As a combined information source and "sales brochure", an auction catalog must tread a fine line between accuracy and promotion. For instance, any damages or flaws must be described exactly, so that buyers cannot be claim to have been deceived, but at the same time the description will typically include words playing down the bad points (as in "brownish spot that does not detract from appearance" or "faint crease, as is common"). Similarly, special characteristics are also called out, such as "one of only four known examples of this type", or perhaps a photograph of an item of jewelry being worn by a famous person.

Auction catalogs may be sent gratis to favored customers, but the better catalogs will cost, sometimes as much or more than a regular book. These kinds of catalogs may in turn be sold by bookstores, or even appear as items in book auctions.

Some time after the auction is concluded, recipients of the auction catalogs will receive a "prices realized" document, a bare listing of the lot numbers and the prices for which each was sold.

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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. In such auctions, the good is worth the same amount to all bidders, but bidders don't know the value of the good and must independently estimate it. Since all bidders value the good equally, the winner will generally be the bidder whose estimate of the value is largest. But if we assume that in general bidders estimate the value accurately, then the highest bidder has overestimated the good's value and will end up paying more than it is worth. In other words, winning the auction carries bad news about a bidder's value estimate. A savvy bidder will anticipate this, and reduce their bid accordingly.

Bid shading is also used in first-price auctions, where the winning bidder pays the amount of his bid. If a participant bid an amount equal to their value for the good, they would gain nothing by winning the auction, since they are indifferent between the money and the good. Bidders will optimize their expected value by accepting a lower chance of winning in return for a higher payoff if they win.

In a first-price common value auction, a savvy bidder should shade for both of the above purposes.

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A box social is a form of fundraiser, wherein donated lunch boxes are auctioned off for some cause (usually charity or raising money), or, alternatively, a woman creates a lunch, which is then auctioned off. Varying depending on the customs, the woman would often go on a date with the person who won the lunch they had prepared. The term originated in the early 20th century, when such boxes were more common in workplace settings.

The Australian meaning of the word is largely quite different. Box Social started to be widely used during the Gold Rush period in Victoria. The large commercial mines that operated at the time were running 24 hours a day, in three shifts of eight hours (12midnight - 8am; 8am - 4pm; and 4pm - 12midnight). As the workers on the 4pm - Midnight shift had their only break at 8pm that evening, their wives & mistresses would take their dinner to them at the mine in steel lunchboxes. On their way to the mines at night, it was not uncommon for the miners' wives to have a social gathering together - which they would bring their husband's lunchbox to on the way to the mine. Hence the term box social.

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A Chinese auction is a type of auction (actually a combination of auction and raffle) that is typically featured at charity or other fundraising events.

In a Chinese auction, bidders are not prospective buyers (as in the conventional English auction). Instead, they buy tickets, which are essentially chances to win items. Bidders may buy as many tickets as they like, and bid them on any item(s) they want by placing them in a basket or other container in front of the item(s) they are trying to win. At the conclusion of bidding, the winning ticket is drawn from the tickets bid on each item, and the item is given to the owner of that ticket.

A bidder may increase their chance of winning by buying and bidding more tickets on a specific item. Although there is generally no limit to the number of tickets a given individual may bid on a specific item, the chance of winning depends on the total number of tickets bid by all individuals.

It is unclear whether this type of auction actually originates in China; it is much more likely that the term derives from "chance auction," which is also another name for this type of auction.

The Chinese auction is similar to the "silent auction," with the difference being that in the silent auction bidders submit bids listing specific amounts that they are willing to pay for a specific item.

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In an English auction (also called an Open-outcry auction), the auctioneer begins the auction with the reserve price (lowest acceptable price) and then takes larger and larger bids from the customers until no one will increase the bid. The item is then sold to the highest bidder.

Variations

There are many variations on this auction system. Sometimes, the reserve price is not revealed. The auctioneer might do this to prevent "rings", groups of bidders who promise not to outbid each other, lowering the final price. Also, bids may be made with signals instead of being called out. Such signals can include tugging an ear or raising a bidding paddle. This system reduces the noise from the auction. Another variation on the English auction is the open-exit auction, where the bidders must announce that they are dropping out of the bidding and they can't reenter. This tells more about how valuable people consider the item up for bid than a regular English auction. In France, when the last bid has been made in an auction for an art object, a member of the Louvre can say "Preemption de l'etat" (Pre-emption of the state) and buy the object for the highest bid.

Advantages and Disadvantages

An English auction has several advantages and disadvantages for both the buyers and the seller. Winner's curse is rampant in these auctions due to strong competition and inexperienced participants getting carried away in the heat of the moment. This is good for the seller. But, the object on sale can be bought for much less than its value if bidding is slow, and rings can take advantage of the nature of English auctions. A disadvantage for both buyers and sellers with the English auction is that everyone must be in communication over the course of the auction, which can be expensive and difficult.

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NYOP is an acronym for "Name-Your-Own-Price", a system where a buyer specifies a price and a product and/or service, and asks sellers to match that combination. A special type of reverse auction.

Name-your-own-price sales are considered "opaque" by marketers because buyers "don't know the name of the supplier (airline, hotel or car rental company) or the schedule (with air tickets) until after" they make a nonrefundable purchase. Suppliers benefit because they can sell to the most price-conscious travelers without publicly disclosing those low rates.

By 2005, Priceline began to de-emphasize this system, and added published price options on their websites.

In Denmark there have recently (July 2006) been an addition in websites that incorporate and develop this business model. The site (www.prisminister.dk[1]) differs from the priceline strategy, by only collecting a deposit before the deal, rather than making the user commit 100% to the purchase. Furthermore the dealer is allowed to make a return offer, if the price the user requests is too low. After the bidding, if no dealer has accepted the users price, the user receives the lowest bid amongst the dealers.

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Request For Proposal (referred to as RFP and also known as Request For Quotation or RFQ) is a business term referring to a request for quotations, through a tender process, on a specific product or service.

An RFP typically asks for more than a price, including: basic corporate information and history, financial information and product information such as stock availability and estimated completion period. The bidder returns a quote or proposal by a set date and time known as a tender closing. The proposals are used to evaluate the suitability as a supplier, vendor, or institutional partner.

A less detailed version of an RFQ / RFP is the Request for Information (RFI), which is a request for very basic information about a firm's capabilities, intentions, and resources to compile an authorised supplier panel.

RFP's often include specifications of the item, project or service for which a proposal is requested. The more detailed the specifications, the better the chances that the proposal provided will be accurate.

Generally RFP's are sent to an approved supplier or vendor list.

Links

• Eutilia - Electronic Tender provider (Technology and Services)
• Contract Tenders - Public Tenders in UK
• TenderSystem - Open Source Reverse Auction Software
• TED - Public Tenders in Europe
• WhyAbe - Free RFP System
• uShip - Online shipping market place

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A reverse auction (sometimes called a procurement auction or tender) is a type of auction in which the role of the buyer and seller are reversed. In a more typical auction, the seller puts up an item for sale, multiple buyers bid for the item and depending on the nature of the auction (English or Dutch), and one or more of the highest bidders buy the goods at a price determined by the bidding.

In a reverse auction a buyer issues a request for quotations (RFQ) to purchase a particular item. Multiple suppliers quote the price at which they are willing to supply the requested item or service. The transaction is awarded to the supplier that provided the lowest price.

Reverse auctions are commonly used to fill government and large value contracts.

From the standpoint of game theory, these auctions are formally equivalent to a more traditional auction.

Reverse Auctions gained popularity in the late 1990's as a result of the emergence internet-based online auction tools. Early adopters of this online tool included General Electric. Later, employees of General Electric broke off to form the company Freemarkets. This coincided with a manufacturing down turn in the late 1990's which compelled suppliers to reluctantly participate in the online Reverse Auctions. Several start ups rushed to fill the Reverse Auction space after Freemarket's rapid growth. Freemarkets was acquired by California based Ariba, Inc. which now markets the Reverse Auction as just one tool in the Electronic Sourcing offering.

The open outcry auction is generally recognized as the most transparent and efficient method to determine a price in a specific market. While open outcry is normally applied in "buy side" auctions, the Reverse Auction remains an option for those wishing to purchase at the best price the market has to offer at a particular moment in time. .

Links

• Eutilia - Reverse Auction and Electronic Tendering service provider
• Contract Tenders - Public Tenders in UK
• TenderSystem - Open Source Reverse Auction Software
• TED - Public Tenders in Europe
• WhyAbe - Free RFP System
• uShip - Online shipping market place

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Unique bid auctions are a type of auction sale in which the participants bid for a particular item by submitting blind or sealed (ie secret) bids: the winner is the bidder who places the highest (or, in some variants, the lowest) unique bid. A "unique" bid, in this context, means one in which the amount offered is different from that offered by any other participant.

In unique bid auctions, it is normal for bidders to be charged for placing their bid. The seller's payment includes the total of these charges, as well as the actual amount bid by the winning participant. For the buyer, the attraction is that they may acquire an item at well below its true value. This type of auction may be regarded as having some of the elements of a normal auction (placing bids) and of a lottery (paying an entry fee and guessing the bids which may be made by other participants).

Variants

The two most common types are maximum and minimum bid auctions. In a Maximum bid auction, a limit is set for the maximum amount that can be bid. The highest unique bid when the auction is closed wins the auction.

In a minimum bid auction the procedure is the same but the lowest unique bid wins.

Examples of a maximum bid auction

For example, a maximum bid auction sets a limit of £10 and the highest ten bids on the auction are
£10.00
£10.00
£9.99
£9.99
£9.99
£9.98
£9.97
£9.96
£9.96
£9.96

The bidder who placed a bid of £9.98 would be the highest "unique" bid and therefore the winner.

In a typical real example, a car worth £20000 might be offered to bidders at a maximum bid of £100. The winning bidder would get the car at a price well below its retail value. If the auctioneer charges £10 a bit then they would need to get 2000 bids to cover the cost of the car. Once the auctioneer has received 2000 bids, any more bids would result in the auctioneer (or the seller) making a profit.

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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. The highest bidder wins, but the price paid is the second highest bid. The auction was created by William Vickrey. This type of auction is strategically similar to an English auction, and gives bidders an incentive to bid their true value.

Vickrey's original paper considered only auctions where a single, indivisible good is being sold. In this case, the terms Vickrey auction and second-price sealed-bid auction are equivalent, and are used interchangeably. When multiple identical units (or a divisible good) are being sold in a single auction, the most obvious generalization is to have all bidders pay the amount of the highest non-winning bid. This is known as a uniform-price auction.

The uniform-price auction does not, however, result in bidders bidding their true valuations as they do in a second-price auction. For that reason, the name "Vickrey auction" in the multi-good auction is usually reserved by economists for a more complicated pricing scheme based on opportunity cost, which does give bidders the incentive to bid truthfully.

Vickrey auctions are much studied in economic literature, but are not particularly common in practice. One market in which they have been used is stamp collecting. eBay's system of proxy bidding is similar, but not identical, to a Vickrey auction. A slight variant of a Vickrey auction is known to be used in Google's online advertisement programme, AdSense, its transparency allowing real-time unmonitored auctions to take place.

Properties

Self-revelation

In a Vickrey auction each bidder maximizes his or her expected utility by bidding (revealing) his or her true valuation.

Ex-post efficiency

A Vickrey auction is ex-post efficient (the winner is the bidder with the highest valuation) under the most general circumstances; it thus provides a baseline model against which the efficiency properties of other types of auctions can be posited.

References

• Vijay Krishna, Auction Theory

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The Winner's curse is a phenomenon akin to a Pyrrhic victory that occurs in common value auctions with incomplete information. In such an auction, the goods being sold have a similar value for all bidders, but players are uncertain of this value when they bid. Each player independently estimates the value of the good before bidding.

The winner of an auction is, of course, the bidder who submits the highest bid. When each bidder is estimating the good's value and bidding accordingly, that will probably be the bidder whose estimate was largest. If we assume that on average the bidders are estimating accurately, then the person whose bid is highest has almost certainly overestimated the good's value. Thus, a bidder who wins after bidding what they thought the good was worth has almost certainly overpaid.

More formally, this result is obtained using conditional probability. We are interested in a bidder's expected value from the auction (the expected value of the good, less the expected price) conditioned on the assumption that the bidder won the auction. It turns out that for a bidder bidding their true estimate, this expected value is negative, meaning that on average the winning bidder is overpaying.

Savvy bidders will avoid the winner's curse by bid shading, or placing a bid that is below what they believe the good is worth. This may make it less likely that the bidder will win the auction, but it also protects them from overpaying in the cases where they do win. A savvy bidder knows that they don't want to win if it means they will pay more than a good is worth. To minimize bid shading, many auctions such as eBay have the bidder pay the price of the highest losing bid. (Note, however, that this lessens but does not necessarily eliminate the winner's curse, because the highest losing bid may still be above the good's value.)

The severity of the winner's curse gets stronger as the number of bidders increases. This is because the more bidders there are, the more likely it is that some of them have greatly overestimated the good's value. In technical terms, the winner's expected estimate is the value of the first order statistic, which increases as the number of bidders increases.

Examples

Since most auctions involve at least some amount of common value, and some degree of uncertainty about that common value, the winner's curse is an important phenomenon.

In the 1950s, when the term winner's curse was first coined, there was no accurate method to estimate the potential value of an offshore oil field. So if, for example, an oil field had an actual intrinsic value of $10 million, oil companies might guess its value to be anywhere from $5 million to $20 million. The company who wrongly estimated at $20 million and placed a bid at that level would win the auction, and later find that it was not worth as much.

Other auctions where the winner's curse is significant:

• Spectrum auctions in which companies bid on licenses to use portions of the electromagnetic spectrum. Here, the uncertainty would come from, for example, estimating the value of the cell phone market in New York City.
• IPOs, in which bidders need to estimate what the market value of a company's stock will be.

Links

• www.gametheory.net - applet demonstrating the winner's curse.
• www.techcentralstation.com - a good article explaining the winner's curse in the context of the Google IPO.
• The Winner's Curse in Baseball - article on how the winner's curse affects bidding for free agents.

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Video: Asymmetric information: auctions and the winner's curse