The basis of modern civilization is the economy of buying and selling. Since the time money came into use, there have been three methods by which a sale can take place. The first and foremost is that the seller sets a retail price and the buyer pays for it, this is simply a take-it or a leave-it offer. The second method is when buyers get to bargain. The seller has set a price but it isn’t as inflexible. The buyer and seller can haggle and reach another price point different than the original one. Finally, there is a third method that is our topic of discussion in this article. This method is called an auction.
An auction is a method where many prospective buyers compete for an opportunity to purchase an item. The buyers bid for the item, either simultaneously or over an extended period of time. There are many types of auctions such as English auctions, Dutch auctions, First Price Sealed Bid auctions, Vickrey auctions, etc. In today’s article, we will discuss English auctions in detail.
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English auctions are the most common type of auctions. These auctions are the type that we see in the movies or on TV. So let’s understand this by imagining a scene –
Example of an English Auction
There is an auction for Tiffany Vintage Jewelry at a famous auction house in London. From politicians, business tycoons, film stars and who’s who of the world has turned up for the auction. The auction starts and the first piece on sale is a vintage ruby and diamond choker. The piece is bought out on display in a glass box on the stage. The auctioneer takes the dais and talks about the choker, its history, its craftsmanship, the studded gems, and diamonds, etc.
Following is the conversation in the auction room –
Auctioneer – “The first item on sale today is this intricately carved invaluable vintage choker. Its opening bid is set at US$ 500,000.00, and you can start bidding above this value. What am I offered for this? I invite your bids”
Bidder-1 (he probably thinks he should get a head start) – “700,000 dollars”
Auctioneer – “700,000 dollars, good start, anyone else?”
Bidder-2 (she really likes the piece, and she is going to give a fight for it) – “850,000 dollars”
Auctioneer – “850,000.00 dollars! That’s great! This really is an invaluable piece (and some other sales pitch), any more bids?”
Bidder-3 (his wife poked him to bid, he would rather buy the lamp that’s going on sale later in the auction) – “One million dollars”
Auctioneer – “Wow, one million dollars, one million! Do I hear more? Do I hear one million and two hundred thousand?”
Bidder-2 (she wants the choker. Period.) – “One million and two hundred thousand”
Auctioneer (by now sounding extremely excited) – “That’s amazing, any other bids? No? Going, going, gone!” hammer down “sold to bidder-2”
Yes, these auctions are indeed so dramatic and exciting.
Now that we already understand the English auctions, let’s learn the theory part of it.
By definition, the English Auction is a sale method in which an asset is sold by inviting bids that are ascending in value. A base price or a floor is set before the bidding starts and the bidders have to start bidding above this base price. The item is sold to the highest bidder.
There are some noted features of the English auction as follows:
Features of an English Auction
- Unlike the sealed bid auctions, English Auctions are completely open and transparent. Which means the identity of all the bidders is known to each other and during the bidding, all the bidders know the value of the bid and the bidder who placed that bid.
- The bids have to be ascending in value.
- Usually, the auction houses set bid price increment mechanisms. For example – bids can be placed only in a multiple of 50,000. So if the opening bid is 200,000 dollars then the next bids can be 250,000; 300,000; 450,000, and so on. Therefore say a bidder bids US$ 100,000, so the other bidders cannot bid US$ 100,001. The idea is to avoid the chaos of such vacuous tactics.
Other Types of Auctions
There are many types of auctions other than English auctions, following is the list of other types of auctions:
A Swedish auction is a less regulated version of an English auction. In this, the bidders are not bound by their bids and the sellers are free to accept or decline whichever bid that seems suitable or unsuitable respectively.
The Dutch auction is commonly known as Descending Price auction. In this, the auctioneer starts with the highest asking price and then the bids are received for a continuously lower price until all items are sold. This type of auction is usually used for bulk sale items, so that whole lot can be sold at once.
First-Price Sealed Bid Auction
In this, the bidders submit the bids in a sealed envelope, and when the envelope is opened the sale is made to the highest bidder. It is also known as Blind auction because any bidder doesn’t know the bid submitted by other bidders.
Also known as Second-Price Sealed Bid auction, the Vickrey auction is exactly like the First-Price Sealed Bid auction. The only difference is that in this auction the highest bidder pays the dollar value of second highest bid rather than his own bid.
In a Candle auction, a candle is lighted at the start of the auction, and when the flame burns out the auction ends. The idea is to keep the end time of the auction ambiguous so as to avert the bidders from making last minute bids.
In a Japanese auction, the bidders do not bid at all. The display price of the item on sale increases continuously as per the auctioneer’s clock. The buyers can exit the auction hall when they are not interested in buying any more. The last standing buyer wins the item on sale.1