An auction is a process of buying and selling goods or services by offering them up for bid, taking bids, and then selling the item to the highest bidder. In economic theory, an auction may refer to any mechanism or set of trading rules for exchange.
There are several variations on the basic auction form, including time limits, minimum or maximum limits on bid prices, and special rules for determining the winning bidder(s) and sale price(s). Participants in an auction may or may not know the identities or actions of other participants. Depending on the auction, bidders may participate in person or remotely through a variety of means, including telephone and the internet. The seller usually pays a commission to the auctioneer or auction company based on a percentage of the final sale price.
History of the auction
The word "auction" is derived from the Latin augēre , which means "to increase" or "augment".
For most of history, auctions have been a relatively uncommon way to negotiate the exchange of goods and commodities. In practice, both haggling and sale by set-price have been significantly more common. Indeed, prior to the seventeenth century the few auctions that were held were sporadic and infrequent.
Nonetheless, auctions have a long history, having been recorded as early as 500 B.C. According to Herodotus, in Babylon auctions of women for marriage were held annually. The auctions began with the woman the auctioneer considered to be the most beautiful and progressed to the least. It was considered illegal to allow a daughter to be sold outside of the auction method.
During the Roman Empire, following military victory, Roman soldiers would often drive a spear into the ground around which the spoils of war were left, to be auctioned off. Later slaves, often captured as the "spoils of war", were auctioned in the forum under the sign of the spear, with the proceeds of sale going towards the war effort..
The Romans also used auctions to liquidate the assets of debtors whose property had been confiscated. For example, Marcus Aurelius sold household furniture to pay off debts, the sales lasting for months. One of the most significant historical auctions occurred in the year 193 A.D. when the entire Roman Empire was put on the auction block by the Praetorian Guard. On March 23 The Praetorian Guard first killed emperor Pertinax, then offered the empire to the highest bidder. Didius Julianus outbid everyone else for the price of 6,250 drachmas per Guard, an act that initiated a brief civil war. Didius was then beheaded two months later when Septimius Severus conquered Rome.
From the end of the Roman Empire to the eighteenth century auctions lost favor in Europe, while they had never been widespread in Asia.
In some parts of England during the seventeenth and eighteenth centuries auction by candle was used for the sale of goods and leaseholds. This auction began by lighting a candle after which bids were offered in ascending order until the candle spluttered out. The high bid at the time the candle extinguished itself won the auction.
The oldest auction house in world is Stockholm Auction House ( Stockholms Auktionsverk ). It was established in Sweden in 1674.
During the end of the 18 th century, soon after the French Revolution, auctions came to be held in taverns and coffeehouses to sell art. Such auctions were held daily, and catalogs were printed to announce available items. Such Auction catalogs are frequently printed and distributed before auctions of rare or collectible items. In some cases these catalogs were elaborate works of art themselves, containing considerable detail about the items being auctioned.
Sotheby's, now the world's second-largest auction house, held its first auction in 1744. Christie's, now the world's largest auction house, was established around 1766. Other early auction houses that are still in operation include Dorotheum (1707), Bonhams (1793), Phillips de Pury & Company (1796), Freeman's (1805) and Lyon & Turnbull (1826).During the American civil war goods seized by armies were sold at auction by the Colonel of the division. Thus, some of today's auctioneers in the U.S. carry the unofficial title of "colonel".
The development of the internet, however, has led to a significant rise in the use of auctions as auctioneers can solicit bids via the internet from a wide range of buyers in a much wider range of commodities than was previously practical.
Types of auction
Primary types of auction
- English auction , also known as an open ascending price auction . This type of auction is arguably the most common form of auction in use today. Participants bid openly against one another, with each subsequent bid higher than the previous bid. An auctioneer may announce prices, bidders may call out their bids themselves (or have a proxy call out a bid on their behalf), or bids may be submitted electronically with the highest current bid publicly displayed. In some cases a maximum bid might be left with the auctioneer, who may bid on behalf of the bidder according to the bidder's instructions. The auction ends when no participant is willing to bid further, at which point the highest bidder pays their bid. Alternatively, if the seller has set a minimum sale price in advance (the 'reserve' price) and the final bid does not reach that price the item remains unsold. Sometimes the auctioneer sets a minimum amount by which the next bid must exceed the current highest bid. The most significant distinguishing factor of this auction type is that the current highest bid is always available to potential bidders. The English auction is commonly used for selling goods, most prominently antiques and artwork, but also secondhand goods and real estate. At least two bidders are required.
- Dutch auction also known as an open descending price 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. The winning participant pays the last announced price. The Dutch auction is named for its best known example, the Dutch tulip auctions. ("Dutch auction" is also sometimes used to describe online auctions where several identical goods are sold simultaneously to an equal number of high bidders.) In addition to cut flower sales in the Netherlands, Dutch auctions have also been used for perishable commodities such as fish and tobacco. In practice, however, the Dutch auction is not widely used.
- Sealed first-price auction , also known as a first-price sealed-bid auction (FPSB). 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 they submitted. This type of auction is distinct from the English auction, in that bidders can only submit one bid each. Furthermore, as bidders cannot see the bids of other participants they cannot adjust their own bids accordingly. This kind of bid produces the same outcome as Dutch auction. Sealed first-price auctions are commonly used in tendering, particularly for government contracts and auctions for mining leases.
- Vickrey auction , also known as a sealed-bid second-price auction . This is identical to the sealed first-price auction except that the winning bidder pays the second highest bid rather than their own. This is very similar to the proxy bidding system used by eBay, where the winner pays the second highest bid plus a bidding increment (e.g., 10%). Although extremely important in auction theory, in practice Vickrey auctions are rarely used.
Secondary types of auction
- All-pay auction is an auction in which all bidders must pay their bids regardless of whether they win. The highest bidder wins the item. All-pay auctions are primarily of academic interest, and may be used to model lobbying/bribery (bids are political contributions) or competitions such as a running race.
- Buyout auction is an auction with a set price (the 'buyout' price) that any bidder can accept at any time during the auction, thereby immediately ending the auction and winning the item. If no bidder chooses to utilize the buyout option before the end of bidding the highest bidder wins and pays their bid. Buyout options can be either temporary or permanent . In a temporary buyout auction the option to buy out the auction is no longer available after the first bid is placed. In a permanent buyout auction the buyout option remains available throughout the entire auction until the close of bidding. The buyout price can either remain the same throughout the entire auction, or vary throughout according to prese
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