BidsCreator Auctions Backgrounder

Auctions: Sales and
Purchase
AN UNDERSTANDING OF AUCTIONS FROM A PRACTICAL BUSINESS PERSPECTI VE
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Auction
Price Discovery Mechanism
Motive:
◦ Find out highest value that a prospective buyer associates with an object, to sell the object at
◦ Find out lowest value that a prospective seller would be willing to dispose of an object, to buy the
object at
Advantage:
◦ Establishes price of sale or purchase, without bargaining or negotiation
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Auction Types
Based on Bidding Process
◦ Transparency: Sealed Bids (ignorance of others’ bids) or Open Bids (awareness of others’ bids)
◦ One-side or Both-sides Bids: Only buyer or seller bids or Both buyer and seller bid
◦ Number of Bids Allowed: Single Bid (usually in Sealed Bids) or Multiple Bids (Revised each time,
usually in Open Bids)
◦ Determination of Winners: Only one winner (usually in Sealed Bids) or Continuous declaration of
winners (usually in Open Bids)
Based on Bidder’s Approach to Valuation – how bidders assign value to the object being
auctioned
◦ Private Valuation
◦ Common Value
◦ Correlated Value
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Sealed Bid Auction
DESCRIPTION AND DETAILS
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Sealed Bid Auction
Salient features:
◦ Single Sided, Buyers bid in a Sale Auction, Sellers in a Purchase Auction
◦ One Seller (or Buyer), multiple potential Buyers (or Sellers)
◦ Single round of Simultaneous Bids
◦ No Revised Bids
Evaluation Approach:
◦ Seller provides object at highest price bid - highest bidder wins (Sale Auction);
◦ Buyer procures object at lowest price bid - lowest bidder wins (Procurement or Reverse Auction)
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Sealed Bid Auction
Variants:
◦ First Price Auction – Winner pays amount equal to his bid (Sales Auction) or Winner provides object at
amount equal to his bid (Procurement Auction)
◦ Second Price Auction (aka Vickrey Auction) – Winner pays amount equal to highest among remaining
bids (Sales Auction) or Winner provides object at amount equal to lowest among remaining bids.
Sr# Bid Outcome
1 5
2 6 Payment
3 7 Winner
4 2
Sale Auction Eg 1
Sr# Bid Outcome
1 3
2 4
3 5 Winner
4 5 Payment
Sale Auction Eg 2
Sr# Bid Outcome
1 5 Sells at
2 6
3 7
4 4 Winner
Purchase Auction Eg 1
Sr# Bid Outcome
1 7
2 6
3 5 Winner
4 5 Sells at
Purchase Auction Eg 2
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Vickrey Reasons
In a first-price auction, you're not bidding your true value, you're trying to guess what everyone else is going to
bid and then put down a bid that's slightly higher than the next person's (unless you think someone is going to
offer more than what you're willing to pay, in which case you just bow out).
In a second-price auction, there's no reason for you to do that. You can simply say exactly the maximum price
you are willing to pay, and there's never any advantage for you in saying anything else:
◦ You don't want to post a higher bid since you might be forced to pay it, and you don't want to do that.
◦ You don't want to post a lower bid since you might lose the item for no good reason at all.
◦ You'll end up paying exactly what it takes to win the item: one dollar or one cent more than the next person's maximum
bid.
So, a second-price mechanism encourages everyone to bid truthfully, and the item ships to the person who
really values it at the highest price. It's the best outcome for the seller and as good an outcome for everyone
else as they could wish for.
◦ Everyone walks in with an idea of how much they're willing to pay, and they keep bidding one dollar more than the current
price until they hit their max—but they're never forced to reveal their max and what they end up paying is just one dollar
(or penny, or whatever) more than the second-highest bidder.
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Open Bid Auction
DESCRIPTION AND DETAILS
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Open Bid Auction
Salient features:
◦ Single Sided, Buyers bid in a Sale Auction, Sellers in a Purchase Auction
◦ One Seller (or Buyer), multiple potential Buyers (or Sellers)
◦ Multiple rounds as determined by bidder for himself
◦ Revised Bids each time
◦ Last revision of each bidder is considered for evaluation
Evaluation Approach:
◦ Depends on Open Bid Variant, explained in Variants’ discussion
Variants:
◦ Ascending Price Open Bid Auction
◦ Descending Price Open Bid Auction
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Open Bid Auction
Ascending Bid Auction (aka English Auction)
◦ Bid amounts increase to outbid other bidders, but bidders become less
◦ Auction closes when only one bidder remains – becoming the winner
Descending Bid Auction (aka Dutch Auction)
◦ Bid starts at a really high amount
◦ Seller decreases the amount multiple times, until one buyer indicates willingness to buy at most
recent reduction in price
◦ Auction closes when the first buyer becomes available
[Flowers, particularly Tulips in Netherlands have widely been sold using this approach, hence the
name Dutch Auction.]
Examples of Open Bid Auctions are those conducted in E-Bay, Google Ad-Sell, English Auction
Houses.
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Dutch Auction for Procurement
Used when supplier pool is less than 3
◦ Suppliers are blind to rank and lowest bid
◦ Price starts really LOW – 20-30% less than lowest bid
◦ Price increases in small increments over a series of time
intervals
◦ First supplier to place a bid within the current interval wins
The biggest reasons for running a Dutch auction are
because of weak competition, tight timelines, or a need
for greater control.
Dutch is ideal when there aren’t many suppliers bidding
for the good or service or there is a large preliminary
bid price gap between 1st and 2nd place.
Event timelines operate with greater predictability as
events can be complete in 25 minutes in a worst case
scenario, for these reasons noted Dutch auctions have
become a personal preference. This preference towards
Dutch auction is also based on the savings results that
compare well to reverse auctions.
Source: Capgemini Consulting https://www.capgemini-consulting.com/blog/procurement-transformation-blog/2013/09/dutch-auction
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Valuation
APPROACH TO BIDDING BASED ON PERCEIVED VALUE
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Approach to Bidding
Valuation is driven by how much the buyer finds the object worthy over and above the current
or indicated selling price.
Bidders come prepared with a pre-set value in mind for bidding, driven by the utility value of
the object they’re bidding for, as per the motive of purchase.
◦ Private Valuation: If the motive of purchase is personal pleasure or consumption
◦ Common Value: If the motive of purchase is subsequent sale for profit, either at a later when the
value appreciates or in another market which values the object higher – Bidders with this motive have
some idea of the object’s future value or value someplace else
◦ Correlated Value: If the composition of participants is a mix of Personal Value bidders and those with
Common Value, the object stands to be valued differently by each bidder type.
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Other Auction Types
NOT TOO PREVALENT, BUT IN VOGUE IN SELECT INDUSTRY
APPLICATIONS
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Other Auction Types
Two-side Auction
◦ Both sides keep bidding till common willingness is reached
◦ Prevalent in (i) Electricity Market (ii) Scarce Resources
◦ Scheduling different user groups for the use of scarce resources
Combinatorial Auction
◦ This is a one-side auction but several related goods are sold in multiple quantities
◦ Bidders are interested in buying a particular combination of related goods
◦ The 3G spectrum was auctioned using this auction type
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