Auction Sale

AUCTION

A sale by auction is a public sale where different

intending buyers try to outbid each other.
The goods are usually sold to the highest bidder.
An auction is a negotiation mechanism where:
The mechanism is well-specified (it runs
according to explicit rules)
The negotiation is mediated by an intermediary
Exchanges are market/currency-based
It is governed by Section 64 in The Sale of
Goods Act, 1930

RULES OF AUCTION SALE

Completion of sale
The sale is complete when the
auctioneer announces its completion by the
fall of the hammer or in some other
customary manner like one two three or
going going, gone

RIGHT OF SELLER TO BID

A right to bid may be reserved expressly by
or on behalf of the seller.
Where such right is expressly reserved, the
seller or any one person on his behalf may
bid at the auction.

A seller is not allowed to bid at an auction

unless he has expressly reserved this
right.

SALE NOT NOTIFIED SUBJECT

TO A RIGHT TO BID

It is not lawful
1. For the seller to bid himself or to employ

any person to bid at such sale.

2. For the auctioneer knowingly to take any
bid from the seller or any such person.
3. Any sale against this rule may be treated
as fraudulent.

RESERVE PRICE

It is the price below which the auctioneer

will not sell.
Where the sale is subject to a reserve
price, every bid is accepted conditionally
on the reserve price being reached.
But where the sale is without reserve, the
goods will be sold to the highest bidder.

USE OF PRETENDED
BIDDING

If the seller makes use of pretended

bidding to raise the price, the sale is
voidable at the option of the buyer.
The bid is said to be pretended when it
is made by the seller or some one on
his behalf.
If it is allowed, it will unnecessarily
raise the price to the prejudice of the
other buyers.
7

KNOCK OUT OR AGREEMENT NOT TO

BID AGAINST EACH OTHER

Where a group of persons form a

combination to prevent competition
between themselves at an auction and
arrange that only one of them will bid
and share anything so obtained among
themselves.
This is called knock out which is legal.

DAMPING

It is the nature of an illicit act intended to

dissuade the prospective bidder from bidding.
The tactics include pointing out defects in the
goods, or misleading the purchaser so that he
may not participate in the auction.
Obviously, damping is highly undesirable and
therefore, illegal. It empowers the auctioneer to
withdraw the property from the auction.

MEDIATION

In a traditional auction, the mediator is

the auctioneer.
The auctioneer manages
communication and information
exchange between participants.
Provides structure and enforcement of
rules.
The mediator is not an agent or a
participant in the negotiation.

Types of auctions
classification

Open vs sealed-bid
One-sided vs. two-sided
Clearing price auction
Number of bids allowed

ENGLISH OUTCRY AUCTION

Bidding takes place in ascending price

level
Bids are publicly known
Variant: only highest bid is known.

Bids must be increasing

Auction closes when only one bidder is
left.

English Auctions

These are the most common auctions

in practice.
Bids ascend, winner gets the item at
the price she bid.
Optimal strategy, bid $0.01 more than
the next highest person.

English Auctions
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.
DISADVANTAGE
everyone must be in communication over the
course of the auction, which can be expensive,
lengthy and difficult.
Open outcry can also reveal information to
others.This may be a problem.
Can also encourage collusion Bidders agree to
keep prices low, possibly reselling later.

DUTCH OUTCRY AUCTION

Bidding takes place in descending order

Used to sell tulips in Dutch flower
markets.
Closes quickly.

Bids are publicly known

Auctioneer starts at max, lowers asking price

until someone accepts.

Auction closes when anyone accepts.

Dutch auctions

Start at max, auctioneer gradually

decreases bid.
Strategy: bid $0.01 above what the
next highest person is willing to pay.
Equivalent in terms of revenue to a
first-price auction.
Has the advantage of closing quickly.

Advantages
The seller recognizes their fullest economic benefits from the

sale
Descending prices ensure bidders will bid promptly when their
internal price is reached
Quick and simple to implement, easy to understand for bidders
Everything is done out in the open, transparency to everyone
involved

Disdvantages
The buyer pays their maximum internal price
Cannot be done when bidders do not all have instant access to

information (for example, someone bidding over the phone

would be at a disadvantage due to the time-delay going through
a bidding proxy)
It only works when 1 product is being sold (If we wanted to sell 2
gold SLS AMG's at the same time, this Simple Dutch Auction
format could not be used.)

VICKREY AUCTION

In this the highest bidder gets the goods

but pays the second highest bid.
Bids are publicly known
It is a type of sealed bid auction
Has the nice property that truth-telling
(bidding your actual valuation) is a
dominant strategy.
This strategy is used by e-bay

FIRST PRICE SEALED-BID

This is how houses, construction bids, etc

are sold.
One-sided (only buyers bid)
Bids are hidden; each buyer bids in secret.
Everyone bids once.
Highest (or lowest) bidder wins.
Bidder challenge: guessing the bids of
other buyers.

Sealed bid auction

In sealed-bid auctions, selecting a bid

price is a serious problem.
Need to guess what others will bid, and

what they think you will bid, etc.

Problem: item may not actually go to

the bidder who values it most.

CONTINUOUS DOUBLE
AUCTION

This is how NASDAQ, NYSE, etc work

Two-sided: Sellers and buyers both bid
Matches are made continuously
Matches are made based on the
difference between the bid price
(willingness to pay) and the ask price
(amount seller wants)
Bidder challenge: guessing future
movement of clearing prices.

Double Auctions

In a double auction, both buyers and

sellers select bids.
Most often, these auctions are
continuous
Any time there is a possible match, it is

made.

The NYSE, NASDAQ, most futures

markets work this way.

Combinatorial auctions

In all the problems weve seen so far, a

single good is being sold.
Often, a seller would like to sell
multiple interrelated goods.
FCC spectrum is the classic example.
Bidders would like to bid on combinations

of items.

I want item A, but only if I also win the

auction for item B.

Combinatorial auctions

If we sell each good in a separate

auction, agents have a hard bidding
problem.
I dont want to win only A, so I need to

estimate my chances of winning B.

We might also let people place bids on

combinations of goods.
Problem: determining the winner is hard.
Determining what to bid is at least that

hard.

Compromise: allow restricted

combinations of bids. (e.g. only XOR)

THANK YOU