Definitions

bidding paddle

English auction

The most typical form of English auction is the Open outcry auction. The auctioneer opens the auction by announcing a SOB, Suggested Opening Bid, a starting price or reserve for the item on sale and then accepts increasingly higher bids from the floor consisting of buyers with a possible interest in the item. Unlike sealed bid auctions, "open outcry" auctions are "open" or fully transparent as the identity of all bidders is disclosed to each other bidder during the auction. The highest bidder at any given moment is considered to have the standing bid, which can only be displaced by a higher bid from a competing buyer. If no competing bidder challenges the standing bid within a given time frame, the standing bid becomes the winner, and the item is sold to the highest bidder at a price equal to his or her bid. More generally an auction mechanism is considered "English" if it involves an iterative process of adjusting the price in a direction that is unfavorable to the bidders (increasing in price if the item is being sold to competing buyers or decreasing in price in a reverse auction with competing sellers). In contrast, a Dutch auction would adjust the price in a direction that favored the bidders (lowering the price for buyers, increasing it for sellers). When the auction involves a single item for sale and each participant has as an independent private value for the item auctioned, the outcome of an English auction is theoretically equivalent (or isomorphic) to that of the Vickrey auction, and both mechanisms have dominant strategies . Both the Vickrey and English auction, although very different procedurally, award the item to the bidder with the highest value at a price equal to the value of the second highest bidder.

Variations

There are many variations on this auction system. Sometimes, the reserve price is not revealed. The auctioneer might do this to prevent rings, groups of bidders who promise not to outbid each other, lowering the final price. Also, bids may be made with signal instead of being called out. Such signals can include tugging an ear or raising a bidding paddle. This system reduces the noise from the auction. Another variation on the English auction is the open-exit auction, where the bidders must announce that they are dropping out of the bidding and they can't reenter. This tells more about how valuable people consider the item up for bid than a regular English auction. In France, when the last bid has been made in an auction for an art object, a member of the Louvre can say "Préemption de l'état" (Pre-emption of the state) and buy the object for the highest bid. Some housing cooperatives similarly allow members of the cooperative to pre-empt any buyer of a house constructed by the cooperative.

English auctions may end at a specified time, or they may end when no new bids have been made after a period of time.

Advantages and Disadvantages

An English auction has several advantages and disadvantages for both the buyers and the seller. Winner's curse is rampant in these auctions due to strong competition and inexperienced participants getting carried away in the heat of the moment. This is good for the seller. But, the object on sale can be bought for much less than its value if bidding is slow, and rings can take advantage of the nature of English auctions. A disadvantage for both buyers and sellers with the English auction is that everyone must be in communication over the course of the auction, which can be expensive and difficult.

An English auction also has the advantage of price discovery. This effect is particularly useful for goods with a currently unknown market value, such as works of art. Unlike the Dutch auction, the seller in an English auction does not limit the maximum possible bid ex-ante.

See also

Notes and References

  • OBOS, a housing cooperative in Oslo that practices preemption.

References

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