Ryan Bowen

1. What are auctions?
An auction is a means by which a price is established for a good or service. Buyers compete with one another in determining this price. There are four main types of auctions: English auction, first price sealed bid auction, second price sealed bid auction & Dutch auction. An English auction is probably the most common type of auction. In this auction the auctioneer starts the bidding with an opening bid. Potential buyers then bid the price up until only one buyer is left who is willing to pay the high price. The buyer who bids the highest wins the auction. The second type of auction is first price, sealed bid auction. In this auction, all potential buyers write their bid on a piece of paper at the same time. In this auction no potential buyer knows the bids of the other buyers as all bids are submitted at the same time. The auctioneer collects all of the bids and the buyer with the highest bid wins the auction. The third type of auction is second price, sealed bid auction. In this auction the bidding process is identical to that of the first price, sealed bid auction. The difference between the two is that in the second price, sealed bid auction, the bidder with the highest bid wins the auction, but is only required to pay the amount of the second highest bidder. In this auction the winner is better off than in the first price, sealed bid auction as he or she wins the bid but only has to pay the second highest bid amount to receive the good or service being auctioned. The last type of auction is a Dutch auction. In this auction the auctioneer starts the bidding with a high price that none of the bidders will agree to pay. The auctioneer then gradually lowers the price until the first buyer speaks up. At this point the auction is over. Finally, the winner’s curse is the realization that one’s winning bid exceeds that of all the other potential buyers. Obviously, in order to win an auction a bidder must submit the highest bid. Yet at the same time, the winner wishes to keep his or her bid as close to that of the second highest bidder in order to minimize over spending to win the auction.


2. What are some real world applications of auctions?
There are many real world examples of English auction, first price sealed bid auction, second price sealed bid auction & Dutch auction. As was stated above, the English auction is the most common type of auction. It can commonly be seen in real estate auctions and car auctions. Sotheby’s, the world's second oldest international auction house which was founded in London in 1774 has used the English auction format during most of its existence. The first price, sealed bid auction is not as popular as that of the English auction, but there are still some examples of it in today’s world. The examples of this auction are seen in markets of refinancing credit and in foreign exchange. Second price, bid auctions are becoming more common in today’s society due to the internet auction website, eBay. While eBay does not use the sealed bid auction format since all bid history is available for bidders to see, its method of conducting its online auctions is that of a second price bid auction. Second price sealed bid auctions are very common in the stamp collecting business. Finally, there are some real world examples of Dutch auctions. Dutch auctions are most common in the Netherlands in auctioning off flowers. Also, often times car auctions are conducted in the Dutch auction format.


3. Sources
Baye, Michael R. (2006). Managerial Economics and Business Strategy. New York: McGraw-
Hill Irwin.

Cho, David D. “10-3 Auction.” MGE601 Managerial Economics. University of Buffalo.
Retrieved on March 29, 2007 from http://www.acsu.buffalo.edu/~jcho4/course/reference/MGE601/10_3_Auction.pdf.

Garratt, Rod, Walker, Mark & Wooders, John. “Experienced Bidders in Online Second-Price Auctions.” University of California,
Santa Barbara. Retrieved on April 1, 2007 from http://www.econ.ucsb.edu/~garratt/faculty/experienced_bidders.pdf.

Oxkenfels, Axel, Reiley, David & Sadrieh Abdolkarim. “Online Auctions.” University of Arizona. Retrieved April 1, 2007
from http://www.u.arizona.edu/~dreiley/papers/OnlineAuctions.pdf.

QuickMBA. “Auctions.” Economics. Retrieved on March 29, 2007 from http://www.quickmba.com/econ/micro/auctions/.

Reynolds, Katie. “Auctions – First Price, Sealed Bid (Discriminatory).” Retrieved on April 1, 2007 from
http://www.agorics.com/Library/Auctions/auction4.html.

Thompson, Peter. “Auctions and Economics.” Chapter 1. Florida International University. Retrieved on April 1, 2007 from
http://www.fiu.edu/~thompsop/principles/auctions/auctions.pdf.


4. Quiz Questions
1. True or false, the most common type of auction is that of the English auction?
A. True
B. False

2. In which auction does the winning bidder not pay the price he or she bid?
A. English
B. First price, sealed bid auction
C. Second price, sealed bid auction
D. Dutch auction

3. True or false, the winner’s curse is the realization that one’s winning bid exceeds that of all the other potential buyers?
A. True
B. False

4. Which auction is commonly used in selling flowers?
A. English
B. First price, sealed bid auction
C. Second price, sealed bid auction
D. Dutch auction

5. Which type of auction does Sotheby’s use in conducting its auctions?
A. English
B. First price, sealed bid auction
C. Second price, sealed bid auction
D. Dutch auction

6. True or false, eBay uses a first price, sealed bid auction method for its online auctions?
A. True
B. False
7. Which sets of auction types are the most similar?
A. English & First price, sealed bid
B. First price, sealed bid & second price, sealed bid
C. Dutch & English
D. Second price sealed bid & Dutch

8. What type of auction is used for foreign exchange?
A. English
B. First price, sealed bid auction
C. Second price, sealed bid auction
D. Dutch auction

Answers:
1. A – This is true as the English auction method is the most common and well know auction type method.

2. C – In the second price, sealed bid auction, the winner bidder pays the amount bid by the second highest bidder.

3. A – This is true because in order to win an auction the winner must outbid the other potential buyers, however he or she wishes
to keep the winning bid as close to the second highest bid as possible.

4. D – A Dutch auction is commonly used in auctioning flowers.

5. A – Sotheby’s uses the English auction method.

6. B – This is false because eBay uses a second price bid auction method.

7. B – The first price, sealed bid & second price, sealed big auctions are the most similar because their method for determining the
winner is identical. The price paid by the winning bidder is the only difference between the two.

8. B – First price, sealed bid auction is often used in conducting foreign exchange auctions.