Research India

Bidding Systems in the World

Tutorial

April 2008

What is Bidding??

• 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)

• In other words, Bidding is a type of mechanism concerned with the allocation of goods

and formation of prices for those goods.

• Auction can differ in terms of the number of participants:

– Demand Auction - X buyers bid for a good being sold

– Supply Auction - Y sellers offer a good that a buyer requests

– Double Auction – X buyers bid to buy goods from Y sellers

• Auction can also differ by the procedure for bidding :

– Open Auction: Participants may repeatedly bid and are aware of each other's

previous bids.

– Closed Auction: Buyers and/or sellers submit sealed bids

Supply AuctionDemand Auction

Double Auction

Types of Bidding

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.

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Regular Bids

Proxy BidsThe 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 BidsWhen 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.

Types of Auctions

Commonly Used Auction Types• English Auction (Ascending-bid or open, oral auction)• Dutch auction (Descending-bid)• First-price, sealed-bid • Vickrey Auction (Second-price, sealed-bid)

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Other Auction Types• Japanese Auction (Simultaneous bidding )• Swiss Auction (with regrets!)• French Auction• Chinese (Raffle format)• Silent Auction

Chart Diagram

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English Auction

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DefinitionIn 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.

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

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Definition

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.

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

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Definition

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)).

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

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DefinitionThis 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)

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

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DefinitionIn 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).

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.

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Japanese Auction

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Definition

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.)

Commonly Used Japanese Auction system normally is not used and usually seen in auction

theory.

Swiss Auction

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Definition

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).

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

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Definition

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)

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

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Definition

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.

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.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

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DefinitionThis 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.

Commonly Used

This auction variant is often used in charity events, when many items

may be auctioned simultaneously.

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