2. Purpose of this presentation is to provide a overview
of DUTCH AUTION, its purpose, and scope in current
economy
3. AUCTION ????
Auction - comes from Latin word auctus to mean
increase.
– Not every auction has increasing prices.
Among one of the first engaging tales - Sale of Roman
empire to the highest bidder in 1764.
A market institution that works on the concept of
competition.
Natural discovery of price and buyers.
Types of auction – English Auction, dutch auction, All pay
Auction, Bidding Fee Auction.
4. Types of Auction
Primary type Auction
─ English Auction: Participants bid openly against
one another, with each subsequent bid higher than
the previous bid.
─ Dutch Auction: In Dutch auction the auctioneer
begins with a high asking price.
─ Commodity Auction: sell more than one identical
item at the same time.
5. Types of Auction
Secondary type of Auction
─ All pay Auction: is an auction in which all
bidders must pay their bids regardless of whether
they win.
─ Buyout Auction: is an auction with a set price
that any bidder can accept at any time during the
auction.
─ Combinatorial Auction: is a type of smart market in
which participants can place bids on combinations of
discrete items.
6. DUTCH AUCTION -
INTRODUCTION
Meaning - In a Dutch auction, the item being sold is
initially offered at a very high price.
Bids are not sealed.
A type of auction in which the price on an item is lowered
until it get its bid.
The first bid made is the winning bid and results in a
sale, assuming that the price is above the reserve price.
This type of auction is convenient when it is important to
auction goods quickly.
7. FEATURES OF DUTCH AUCTION
The auctioneer begins with a high asking price.
This is also known as a "clock auction" or an open-
outcry descending-price auction.
Price get lowered until some participant accept it.
A sale never requires more than one bid.
9. WHY DUTCH AUCTION?
o It is fastest way to dispose of materials:
Bidding is easier
There is typically only one bid
Bidders typically bid earlier
o Dutch auction tend to generate higher prices.
10. Why not Dutch Auction?
Overhead of time and infrastructure.
Unnecessarily increases the bid price.
It creates confusion among bidder.
11. auction setting
Forward auctions: a seller selling items to buyers
(bidders).
Reverse auctions: a buyer buying items from
sellers/suppliers (bidders).
Both the settings are natural transpose of each
other.
winning participant pays the last announced price.
12. AUCTION IN PRACTICE
Transfer of assets from public to private: Sale of
industrial enterprises in Eastern Europe,
transportation system in Britain, timber rights all over
the world, and off-shore oil leases.
Auction of spectrum rights worldwide - US, Europe,
and even India.
Internet auctions of consumer goods (amazon.com,
ebay.com etc.). Google's Adword auctions.
Procurement auctions - freemarkets.com (now Ariba),
GM and IBM's sourcing solutions.
13. PROCESS
The item being sold
is initially offered at a The price is lowered
very high price. in decrements until a
bidder accepts it.
Bidder
who
accepts
pays that the
decided price current
for the item. price
wins
the
auction
14.
15. EXAMPLE
suppose a business is auctioning off a used company
car
the bidding may start at $15,000.
The bidders will wait as the price is successively
reduced to $14,000, $13,000, $12,000, $11,000 and
$10,000.
When the price reaches $10,000, Bidder A decides to
accept that price and, because he is the first bidder to
do so, wins the auction and has to pay $10,000 for the
car.
16. Dutch auction is not a Second item
Auction
A Second Item
Dutch Auction Auction
Seller offers one time at a Seller offers more than one
time to sale. identical items for sale.
Only one bidder can win. Winner can be more than
Winning participant pays the one.
last announced price. All winning bidders need to
A sale requires only one bid. pay only the lowest qualifying
(successful) bid.
A sale requires more than
one bid.
18. The “Dutch auction” is
another mechanism for an
IPO
Nor many do this
Most famous: Google,
August 2004
19. Dutch Auction
Seller announces total shares to be auctioned
(Qshares)
Potential buyers submit bids for (Shares, Prices)
Auction moves price down until
Shares demanded above this price =Qshares
20. Dutch Auction Example
Qshares = 10
Bids
2 at $10
1 at $9
3 at $8
4 at $7
2 at $6
4 at $5
Sell 10 to first 4 bidders at price = $7
22. DUTCH AUCTION SHARE
REPURCHASEs
It is introduced in 1981.
allows firms an alternative to the fixed price tender
when executing a tender offer share repurchase.
It offer specifies a price range within which the
shares will ultimately be purchased.
The purchase price is the lowest price that allows
the firm to buy the number of shares sought in the
offer.