Descending-price auctions are called "Dutch" auctions because the technique is used in the Netherlands to auction produce and flowers.
WARNING! Different people call different kinds of auctions "Dutch" auctions. Read the below description carefully, as that is the definition that will be used throughout this site.
The Dutch auction is also known as an open-outcry descending price auction, and is sometimes referred to as a "clock auction." The seller or auctioneer starts at a high price and subsequently lowers the price repeatedly as time passes. This is sometimes done by having a clock which ticks down the price second-by-second. The first bidder who communicates that he will accept the current price wins the item at that price.
In the Dutch auction, each bidder must choose a price at which she will stop the price decrements, conditional on no other bidder having already stopped them, and the bidder who chooses the highest price wins the object at her chosen price. Therefore, although we describe the Dutch auction as a dynamic game, each bidder's problem is essentially static.
The Dutch auction is sometimes referred to as the "open first-price auction," and it is strategically equivalent to the first-price sealed-bid auction.
The Netherlands exported about 4.6 billion euro of horticultural products in 2002. More than 3.4 billion euro of this total consisted of cut flowers and pot plants sold on the Dutch flower auctions. The largest of these auctions, the Aalsmeer Flower Auction is a huge commercial enterprise that in 2002 had: more than 1.5 billion euro in sales; 1,375 buyers; 6,734 suppliers; 1,959 employees; and 999,000 square meters of floor space. The majority of flowers and pot plants sold on the Aalsmeer auction and other Dutch flower auctions were grown in the Netherlands. But the flower auctions also sell flowers and pot plants grown in many other parts of the world, making the Netherlands the world center of this trade. In 2002, 60% of the flowers in all international trade were exported from the Netherlands.
The name, “Dutch auction” can refer to an auction enterprise, such as the Aalsmeer Flower Auction, that is located in the Netherlands. But the name is more commonly used to denote the type of auction that is used to sell flowers and pot plants at Aalsmeer and other such auction houses. This is a decreasing price clock auction that works as follows. A Dutch price clock at Aalsmeer starts at, what for a specific product is known to be, a high price, The hand on the clock starts at the top, at the beginning price, and moves counter-clockwise to lower prices. Whenever a bidder stops the clock, by pushing a button, a sale occurs at that price. Immediately after stopping the price clock, the buyer speaks into a microphone to inform the auction staff of his desired quantity at the price on the stopped clock. Then the price clock momentarily runs clockwise, to a slightly higher price, before resuming its counter-clockwise path to lower prices. The next bidder who stops the price clock buys at his chosen price, and so on until the lot of flowers or pot plants is completely sold and the auction subsequently proceeds to sell another lot. When flowers or plants are actively being auctioned, transaction prices are formed about once every four seconds on each price clock. Thus the Dutch flower auctions are very fast, which is an important feature of an auction used to sell a highly perishable commodity such as cut flowers. Indeed, the Aalsmeer Flower Auction has 13 clocks in five auction rooms, with each price clock yielding a transaction price every few seconds.
- Vernon L. Smith. "Auctions," in J. Eatwell, et al. (eds.), The New Palgrave: A Dictionary of Economics (New York: The Stockton Press, 1987).
- Paul Milgrom. Auctions and Bidding: A Primer (in Symposia: Auctions), The Journal of Economic Perspectives, Vol. 3, No. 3. (Summer, 1989), pp. 3-22.
- R. Preston McAfee and John McMillan. Auctions and Bidding, Journal of Economic Literature, Vol. 25, No. 2. (Jun., 1987), pp. 699-738.