Thematic Studies of Auction Mechanics

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It is widely known that an auction is a public sale of goods or services, property and other objects, which is carried out according to predetermined rules. Despite the huge historical diversity of methods, the principle common to all auctions is competition between buyers and the victory of one participant who offered the highest price. At the same time, sales are a special kind of intermediary organizations that facilitate trade turnover. The purpose of this work is to study the principles of current auctions and compare the known historical types of auctions.

English auction, being the most common type of sale, implies that participants alternately offer increasing prices for the goods until there is only one auctioneer – the winner. It is worth noting that the auction with rising prices can be conducted in a vowel and implicit way. In the first case, the anchor calls the initial bid of the lot. The price increase is within 2.5 percent of the original value of the product. Each participant calls a new bet and the one who offered the maximum price wins. If the next price increase is not offered, the auctioneer strikes with a hammer after a threefold refinement, confirming that this lot was sold to the last buyer who offered the highest price. Implicit auction procedures are often used for the sale of art objects and jewelry. Instead of direct sound signals, participants submit to the auctioneer conditional signs of their agreement to raise the price by a fixed mark-up. Implicit auctioning allows the buyer’s name to be kept secret.

The relatively opposite is the mechanism of the Dutch auction. This type of open bidding, in which the highest price for the goods sold is announced first and then reduced to the one agreed to by the first buyer, is widespread in Western Europe (Adam, Eidels, Lux, & Teubner, 2017). A distinctive feature of the Dutch auction is that it is a wholesale auction in which the seller can put up many items at once.

Comparing the two types of auctions described above, it is easy to identify similarities and differences in the mechanism of their conduct. Thus, both sales are open-type auctions, including public information about participants, goods, and the cost. On the contrary, the technique of the auction itself differs (Numberphile, 2017). In the English version, the initial rate is gradually increased, while the experience of the Dutch auctioneers is to reduce the initial amount. If the English auction is consistent, the Dutch auction is distinguished by the possibility of wholesale sales. Historically, Dutch auctions have been used to sell perishable goods, such as tulips and fresh fish, so they have been held within a very tight time frame (Adam et al., 2017).In contrast, English trading has a fixed duration and stricter regulations (Wu, Lin, Wu, & Lin, 2015). A significant difference is the determination of the winner of the auction: the bid-rise auction ends when the bidder who has named the amount for the product is determined. In the situation, with the Dutch auction, the auction ends when one of the participants presses the button to stop lowering the price.

Closed auctions are divided into many subtypes, which include the sealed-bid, first-price sale, and the Vickery Auction. It is worth to compare these subtypes and determine the advantages and disadvantages of each of the methods. Being almost a tracing from the English auction, the Vickery Auction carries out the trades, during which the participants submit a single bid on the lot in closed envelopes (Numberphile, 2017). The bidder who offers the highest bid is eligible but does not pay the bid price but the second-highest bid. Similar subspecies of closed auctions are a sealed-bid first-price auction, during which the winner who offered the maximum bid pays it, unlike the Vickery Auction (Numberphile, 2017). It is at such sales that state assets, licenses for mining minerals and fuel and state land are sold. Both variants of closed auctions are most often used to reduce the risks of the customer, primarily related to the possible collusion of participants, but the cost of this is a reduction inefficiency.

English auction is not ideal if the lot is unique to real estate objects. With an unknown initial value of the lot, unscrupulous auctioneers can implement fraudulent schemes, forcing participants to pay tens of times higher than the current price (Wu et al., 2015). In this regard, Concierge Auctions Limited, using the English model, may be suspected of committing criminal acts for personal gain (Clarke, 2019). To prevent possible doubt, it is recommended that the type of trade be changed from open to closed, so that participants are not aware of the capabilities of other parties. By making the bidding single, it is possible to maximize the objectivity of the bidder’s victory. A suitable option would be a Vikri auction with independent bids in which each bidder maximizes utility by naming an accurate individual valuation of the product’s value.

It is wrong to think that the auction methodology is suitable only for art lovers, aesthetes, and rich people. A fantastic application of financial strategy can be found in games. Almost all modern online games are equipped with a private auction, in particular, Warcraft (Wu et al., 2015). The point of using an auction in the game is to maximize the sales of easily accessible materials and the highest economic efficiency of sales of rare copies. A closed bidding model is used: the participant appoints his price for the lot and waits for information on whether his bid has won or not. It seems that electronic games are better-suited options for open auctions because then the competition will be more “live.”

Moreover, auctions are also used in electronic trading. In this case, the buying process is done on specialized sites. One such place is the Auction Nation platform, which provides the user with a choice of any auctioned goods (Wu et al., 2015). For each particular lot, the type of auction, the initial bid and the timing of the sale are described. This type of electronic auction platform is a useful tool for those who regularly shop online. The fact that most auctions are closed reduces the likelihood of fraudulent schemes. The method of buying goods through a sale on the eBay online platform has become quite common among consumers. A bidder publishes his or her bids for a particular item and the maximum price he or she could have paid (Numberphile, 2017). The specificity of the auction is supported by open bidding, which is based on the principle of raising the bid in real-time: a participant can monitor changes in bids and make decisions.

The non-profit organization has the right to sell goods through auctions. But there are two peculiarities associated with private sales, whatever form they take. Firstly, the relevance of such events is low, because the consumer is not interested in auctions from non-commercial companies, because the market is overflowing with sales from well-known companies and brands. Secondly, if a non-commercial organization creates an auction, the consumer can be sure that the proceeds are used not for the enrichment of the organizers, but, for example, for some socially relevant business. Furthermore, there is an absolute taboo prohibiting the distribution of income among the founders of a non-profit organization. World practice shows that the primary income of such organizations consists of dividends, proceeds from the sale of services or goods, and auctions.

A company interested in receiving returns from auctions should know several ways to increase the benefits. One of the most popular schemes is the participation of the auctioneer in the English auction, which encourages even major players to disclose the real value of the contract (Numberphile, 2017). Eliminating the impact of fraudulent schemes is possible by filtering participants before each new bidding. Moreover, it is recommended to strictly limit the closing time of auctions, because the most significant benefit for companies is usually made in the last minutes of the sale, in a highly competitive environment. The one in which participants have to pay for participation will be a financially advantageous auction. The resulting “war of attrition” has a positive effect on the value of the lot.

In conclusion, one has to note that there are many different approaches to auctioning, and each has its historical significance. Modern auction systems offer integrated plans for selling lots. Open and closed auctions are found not only in auction houses but also in online games and shops. In general, the introduction of such a system has a positive impact on the profitability of the selling company and develops competition among participants. In addition, measures should be taken to eliminate the possibility of fraud during auctions. These measures may include the transition to closed bidding and filtering of bidders at each stage.

References

Adam, M. T., Eidels, A., Lux, E., & Teubner, T. (2017). Bidding behavior in Dutch auctions: Insights from a structured literature review. International Journal of Electronic Commerce, 21(3), 363-397.

Clarke, K. (2019). Concierge Auctions, a leader in luxury properties, fights accusations it drums up fake bidders. Web.

Numberphile (2017).The ideal auction – Numberphile[Video file]. Web.

Wu, T. C., Lin, T. Y., Wu, T. S., & Lin, H. Y. (2015). Efficient English auction scheme without a secure channel. International Arab Journal of Information Technology (IAJIT), 12(3), 246-252.

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Thematic Studies of Auction Mechanics

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