Bidding Systems in the World Tutorial April 2008
What is Bidding?? <ul><li>Bidding is normally termed as ‘Auctioning’. Auction can be defined as a mechanism to find out the real market price of a particular item. ( Auction - comes from Latin word auctus to mean increase) </li></ul><ul><li>In other words, Bidding is a type of mechanism concerned with the allocation of goods and formation of prices for those goods. </li></ul><ul><li>Auction can differ in terms of the number of participants: </li></ul><ul><ul><li>Demand Auction - X buyers bid for a good being sold </li></ul></ul><ul><ul><li>Supply Auction - Y sellers offer a good that a buyer requests </li></ul></ul><ul><ul><li>Double Auction – X buyers bid to buy goods from Y sellers </li></ul></ul><ul><li>Auction can also differ by the procedure for bidding : </li></ul><ul><ul><li>Open Auction: Participants may repeatedly bid and are aware of each other's previous bids. </li></ul></ul><ul><ul><li>Closed Auction: Buyers and/or sellers submit sealed bids </li></ul></ul>Supply Auction Demand Auction Double Auction
Types of Bidding <ul><li>A Regular Bid is a standard in auction bidding, under which the amount that bidder place into this field will be the amount of the bid that he are making. The major drawback of this bidding system is that the bidder needs to continually update his bid. </li></ul>Regular Bids Proxy Bids The Proxy Bid takes advantage of the computer in the On-Line auction environment. By bidding as much as bidder wants to spend and using a proxy bid software, which will automatically advance the bidding if someone bids more than the current bid. Reverse Bids When a seller sets a Reserve Bid amount they are stating that this value, which is not disclosed to the bidders, except to announce whether the Reserve Bid has been met, is the lowest bid that they will accept as a successful auction.
English Auction <ul><li>In this type of auctioning system, participants bid openly against one another, with each bid being higher than the previous bid. The auction ends when no participant is willing to bid further, or when a pre-determined "buy-out" price is reached, at which point the highest bidder pays the price. </li></ul>Definition Commonly Used English auction (since 1674) is used for chattel, art, antiques and for real estate (especially in Australia). E.g. English auction houses like Sotheby's, Christie's, and Phillips Absolute Vs. Reserve If the seller may set a 'reserve' price, then the item will remain unsold if the auction fails to have a bid equal to or higher than the reserve. If there is no reserve price, the auction is called ‘absolute’.
Dutch Auction <ul><li>In this type of auction system, the auctioneer begins with a high asking price, which is lowered until some participant is willing to accept the auctioneer's price, or a predetermined minimum price is reached. The winning participant pays the last announced price. </li></ul>Definition Commonly Used Dutch Auction system (since 1887) is normally used when several identical goods like wholesale cut flowers, tobacco, farm products, fish and other perishables are sold simultaneously to an equal number of high bidders.
Sealed-bid First-price Auction <ul><li>In this type of auction all bidders simultaneously submit bids so that no bidder knows the bid of any other participant. The highest bidder pays the price they submitted. (this system is also known as Sealed High-Bid Auction or First-Price Sealed-Bid Auction (FPSB)). </li></ul>Definition Commonly Used First price auction (since 1770) is used for industrial real estate, building contract work and whenever only one or very few bidders are expected to participate. Winner's Curse The winner actually bids the furthest from the average bid, which is the best estimate of the item’s actual worth (reasonable information). In a Single Unit auction, it is the difference between the amount the winner paid and the next lower bid.
Sealed-bid Second-price Auction / Vickrey Auction <ul><li>This system is popularly known as Vickrey auction. This system is identical to the sealed first-price auction, except the winning bidder pays the second highest bid rather than their own. (This system was developed by Mr. William Vickrey) </li></ul>Definition Commonly Used Second price auction (since 1961) is used for treasury bills. This system is normally used, when the difference between the highest bid and average bid is quite high.
Double Auction <ul><li>In a double auction, both buyers and sellers select bids. Offers are ranked and matches are made based on the difference between the “bid” price (willingness to pay) and the “ask” price (amount seller wants). </li></ul>Definition Commonly Used Double Auction System is used in stock exchanges like NSE, BSE, NYSE etc. Open-outcry VS Sealed-bid Under Open Double Auction, the buyer and seller can modify the bid based on knowledge gained from other bids. On the other hand, under sealed-bid Double Auction, buyer and seller can not modify the bid.
Japanese Auction <ul><li>A type of sequential second price auction, similar to an English auction in which an auctioneer regularly raises the current price. Participants must signal at every price level their willingness to stay in the auction and pay the current price. Thus, unlike an English auction, each participant must bid at each level to stay in the auction. The auction concludes when only one bidder indicates his willingness to stay in. (This auction format is also known as the button auction.) </li></ul>Definition Commonly Used Japanese Auction system normally is not used and usually seen in auction theory.
Swiss Auction <ul><li>A Swiss auction is similar to a first-price auction, but there is an important difference. Whereas the winning bid in a first-price auction is immediately legally binding for the winner, that is not necessarily the case in a Swiss auction. (Swiss auction has been used since about 1950). </li></ul>Definition Commonly Used Swiss auction (since 1950) is used for building contract work, where the winning bid is subject to certain conditions like the original specifications have been modified or the available workforce has been reduced due to other not foreseeable commitments. Sometimes, possible conflicts between the architect and the building contractor can amount to unsurpassable difficulties, making it impractical to go ahead with the building project. In that case normally, the contract is awarded to the second best bidder instead. If however the difference in price between the two best bids is greater than a predetermined amount (usually 10%) the firm submitting the best bid may still be forced to honour its bid (or pay damages). In case of Conflict Situation
French Auction <ul><li>This type of system is used when several vendors and several buyers announce their quantities and prices. In a matter of seconds a computer will calculate exactly what price level will result in a maximum quantity being traded. (This system is also known as Walrasian auction) </li></ul>Definition Commonly Used French auction (since 1874) is used for gold, stocks and bonds. At the London Bullion Market the World Market Price for gold is settled at the “morning fix” at 10:30 and at the “afternoon fix” at 15:00. For stocks and bonds at the large exchanges of the World, French auction is used primarily for the first morning transactions.
Chinese Auction <ul><li>A form of all-pay auction in which every bidder pays his or bid to the auctioneer, and the winner is selected randomly with probability proportional to one's bid. This is equivalent to a raffle, and is often implemented by having bidders purchase lottery tickets at a fixed price per ticket. The winner is selected randomly from among all tickets purchased. </li></ul><ul><li>A bidder may increase the chance of winning by buying and bidding more tickets on a specific item. Although there is generally no limit to the number of tickets a given individual may bid on a specific item, the chance of winning depends on the total number of tickets bid by all individuals. </li></ul>Definition Commonly Used Chinese auctions are often used to model political elections or patent races, in which the chance of winning is seen as proportional to the amount spent. Raffle - a lottery scheme where tickets are sold for a chance to win a prize at a draw. Raffle VS Chinese Auction The difference between a raffle and a Chinese auction is that in a raffle with multiple prizes, there is one "hat" from which names are drawn, but in a Chinese auction each prize has its own "hat". This allows ticket buyers can choose which prize to focus on, as opposed to having a first, second, third, etc. prize.
Silent Auction <ul><li>This is often a variant of an English auction, where bids are written on a sheet of paper, and at the predetermined end of the auction, the highest listed bidder wins the prize. Participants submit bids normally on paper, near the item. </li></ul>Definition Commonly Used This auction variant is often used in charity events, when many items may be auctioned simultaneously.
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