Understanding Auctions and Auction Theory: Part 1

We have all been in an auction situation, or have an idea of what it means. In economics, this is one of the main subjects of study that give many people a really hard time understanding. It may seem as easy as buying and selling of goods through bidding, but there is so much that needs proper understanding. As an economics student, you will be coming across different models and theories that try to explain certain consumption behavior. You will discover that most of these theories are tied to each other. In other words, where one works, another one may have the same application.

Take, for instance, the gaming-theory. It is one of the main models that have been used to explain consumption behaviors. You will also find consumption theory and other models explaining fir, and individual decision-making approaches in the same boat. This is the same place you will find the action theory. In this unit, we are going to look at the meaning of auctions and why they are important. We will then discuss the auction theory to understand why individuals place bids or prefer buying things in action, which would be cheaper on a normal market situation.

Many experiments have been carried out to determine individual choices, some of which use test assumptions on Homo Economicus. The strategic interactions have also been tested using game theory and testing classical notions of competitive equilibrium. All these are subjects that deal with one party winning the most benefits at another party's expense. It is essential to understand that life is all about competition, and what we do today will always have an impact on what others have, or how they behave.

Consider that an auction is a mechanism in which a potential buyer is expected to submit messages (called bids), and the specific items are distributed based on the set of information received. Auctions are guided by a huge set of rules, whereby each generates different rules. And there are different types of actions as well; each is defined by these rules and what involved parties require. In the private auction, for instance, the owner of valuables such as paintings, collectibles, specialty inputs to production, among others, may set the auction in place because they are looking for specific outcomes, including financial gains. The rules they set are aimed at making each party gain some sort of fulfillment, and even feel happy about what they do.

What is an auction?

Defining the term auction comes with different requirements. First, one needs to understand the process of buying and selling goods under normal circumstances. In this case, the seller offers a specific price for the goods or services, and the buyer can either accept the set rates or bargain for a better deal. This is a simple process within the markets that defines the relationship between consumption and demand. Secondly, the need to know where suppliers and consumers require in a normal buying and selling process. When consumption is high, it raises demand, which may have a negative impact on supply. High demand raises prices of goods, and sometimes  becomes overwhelming to producers.

An auction system of buying and selling works a bit differently, whereby, instead of offering specific prices, bids are offered on these goods, and people are allowed to bid and sell to the highest bidder. It is not about the market price of the product, or how much the seller is going to gain, but how much the buyer is willing to pay for the item. Bidding can start at a lower price than the real value of the products, but by the end, the winning bid is chosen, it may have doubled beyond such prices. This means that people compete against each other in auctions, with the subsequent bid coming higher than the previous one. Once the seller places an item on the market, the auctioneer calls it out at a relatively lower price in order to attract more a huge number of bidders. When bidders see the low price, especially if the item is good, each one of them will want to be the winner. These prices are increased whenever someone makes a new offer, which is always higher than the previous one. If there is no other bidder willing to give more than what the current bidder has given, they become the highest bidder and take the item. But that is not the end of the auction yet. It only comes with the vendor accepts the highest bid, and the buyer makes the payment for the goods or services to take possession.

In many cases, auctions are considered synonymous with the sale of antiques, rare collectibles, and paintings. However, they are also by investment banks to attract the highest possible price when selling a company. This process usually begins by inviting multiple buyers to the action, where a high number of participants usually means the best output. It comes with more competitive bidding that will push the price higher, enabling the bank to reap maximum benefits from the sale. Contrary to this, most buyers would prefer to go for propriety sales than be in action. Auctions come with less control over the purchase price, and they will always buy at the highest. Under propriety sales, the buyer can bargain for the lowest price, which means they are more likely to get more profits.

How did auctions begin?

Another great way of learning auction is by looking at its history. This process can be traced back to around 500BC in ancient Greece, where women were auctioned off for marriage. It was illegal then for women to get into a marriage without going through the process. The action would start the action by introducing women who were considered more beautiful among the women of that day. The auctions then followed a descending price method, start from the highest going low until the right price was found. As long as the buying price was equal to or lower than the reserve price set by the seller, the process would have ended successfully.

The auction was also very popular in the US, where early ones we'rewere used to sell farm produce, estates and slaves. During the American Civil War, returning soldiers usually sold what they got from the war through auctions. However, only soldiers holding a rank of colonel and above were allowed to sell their war spoils. The auction business gained even more traction during the Great Depression when many people declared statues of bankruptcy. They were forced to liquidate their assets, which led to auctioning off what they held, helping them get their assets sold quickly.

As years went by, the need for qualified auctioneers grew, prompting auctioneer Carey Jones to open the first auctioneering school in the early 1900. The school was located in Davenport and became a major center for producing qualified personnel for auctions. This was about the same period when the use of technology started taking roots in many parts of the world. Auctioneers then started using computers, cell phones, and fax machines to make their trade more efficient. Some auctioneers simply took their items' photographs and projected them on big screens to give a clear view to potential buyers. This becomes even easier in 1955 when eBay, the first online bidding site, opened in the US, setting a new stage for auctioneering business. Online auctions have become more popular with many sellers because it allows for a huge number of potential bidders to join the race. Besides, it is much easier to put up a wide range of products, which can be found through a button's simple click.

How does the auction process happen?

Auctioning is an important aspect of modern economics. Economists are always trying to establish why consumers make certain decisions under different situations, which could have a huge impact on the general economy. It is not just about why they buy the items, but why they would pay the goods' set prices from the auctions.

Before actions start, potential buyers are given time to preview and check items on sale to examine their conditions. The auctioneer may announce the preview period as being the evening before the auction day, or a few hours to start the bidding process. Once potential buyers finish with viewing all the items and are interested, they have to register with the auctioneer, where they are given a bidder card with a number to identify them.

The auctions are usually set to start with the sound of a bell. The auctioneer then gives a brief description of the items in for sale and starts bidding with prices that he/she considers reasonable for opening the bid. Or, the seller may set the lowest price they will accept, which makes it easier for the bidding to start. The bidders call out their bids, with each placing a higher number than the previous. The process then ends when there are no more bids, and the buyer has placed the highest bid for the item. In the end, the winner walks away with the product after paying their final bid price.

What are the different types of actions?

According to William Vickrey, there are four types of single-unit actions. They include:

English Auctions

This is the most commonly used type of auction today. It is also known as open outcry auction. It is defined as an open ascending price auction where participants bid against each other. The bidder places a higher bid than the subsequent one with the aim of winning the item. The auctioneer announces the prices, while the bidders call out their bids, or sometimes raise their number until there is no one willing to take things further. The process is completed by the auctioneer accepting the final bid. This type of action is called outcry because of the items mostly involved and how they are called out. It is usually used in selling wine, antiques, tobacco, and art. It has become a very popular method for buying and selling goods and services today. And the best part is how easy this action is.

Dutch Auction

Now far from the English Auction is the Dutch auction. This is a descending price process that starts with a high asking price and lowers the bid until one of the bidders is willing to accept the auctioneer's price or the reserved price from the seller. The goods for sale are given based on the bid order, in which case the highest bidder picks their items, and then the second-highest bidder follows, and so until the order is finished. Dutch auctions are usually applied in perishable commodities such as flowers, fish, tobacco, and sometimes investment securities. It is also a very popular action type that has been embraced by many people.

First-price Sealed-Bid Auction

This type of action is also called blind action, and it is easy to see why. All bidders submit sealed bids simultaneously so than no bidder may know what their competitors have placed. Each bidder can only submit a single bid and cannot change their bid price. In a buyer-bid auction, the highest bidder wins the item at their bid price, and in a seller-bid action, the lowest' bidder' wins the right to sell the item at the highest bid price acceptable. This type of auction is mostly associated with government contract tendering, mining leases, military procurement, refinancing credit, and foreign exchange.

Second-price sealed-bid auction

This type is not very much different from the first-price sealed-bid auction, except the highest bidder takes product at the second-highest bidder's price. For instance, where the highest winning bid price was $500, and the bid before was $450, the winning bidder only pays $450 for the item. It also features a seller-bid auction where the lowest bidder sells the item at the second-lowest bid.

Conclusion

Auctions are not a new thing, and we meet them every day. It is only that we have never looked at some situations that are being linked with auctions, even though there is some form of bidding. In economics, auctions are among the defining factors for consumer and producer theories concerned with decision-making. And we can understand this more by looking at the auction theory.

Author: James Hamilton