Understanding the term: Minimum-Bid Auction
A Minimum-Bid Auction is one of the most used auction types in the commercial world. In such an auction, the seller and the agency managing the auction pre-determine the lowest and most acceptable price. And all the bidders must place a minimum bid for that price to get the asset under auction. In other words, all such bids that do not bid for that advertised/pre-determined minimum bid price remain invalid and ignored. Moreover, the seller and the auction firm publish this minimum price on all marketing materials, including auction brochures and advertisements. Before the start of the auction, the auction agency/firm announces that minimum bid price. Another name for this type of auction is the minimum published bid auction.
In this type of auction, the seller will accept the bid that is at or over the published minimum price. Such a type of auction is suitable for properties that have been on the market for some time or are well known to the public. That means the bidding public has a fair idea about the asset under auction. And they can take a well-judged call about the bidding price.
For example, Mr. A wants to sell his plot of 500 sq. ft at least at the prevailing market rate, which is $100 per sq. ft. This means the minimum-bid price is $50,000. So, Mr. A will not sell the plot if any bidder does not bid at or above $50,000.
Advantages and Disadvantages of Minimum-Bid Auction
Such a type of auction provides a safety net for the seller. This means the seller will not be made to sell the product even when he is not getting the minimum bid amount he has planned for. So, once the bidding reaches a minimum amount, the product is sold as it is under “absolute auction,” i.e., to the highest bidder. Therefore, effectively such an auction reduces the risk for the seller.
Another advantage is that such an auction makes the buyers aware of the minimum price that a seller expects for their asset. Or, we can say the buyers know the minimum amount they will have to shell to get the asset.
Talking about the disadvantage of this type of auction, its biggest drawback is that it may limit the number of buyers in an auction if the minimum price is too high. Another drawback is that it could get hard to generate excitement for such auctions on the auction day.