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A casual introduction to auctions

A curious wanderer at this site might think that he/she has never participated in an auction. After all, auctions probably remind you of stories of antique auctions in the wilds of Vermont woods, or maybe a livestock auction in the heart of Illinois. You might be pleasantly surprised to learn that you probably do participate in more auctions than you realize.

Well what are auctions ?

Many market transactions actually involve auctions. Stores such as the former Filene?s Basement in Boston use a clever pricing strategy to keep customers coming back for more: they reduce the prices on items remaining on the racks successively each week until either the goods are purchased or the price gets so low that they donate the items to charity. As a shopper you probably would love this won?t you? Well, what you are participating in is known as a descending price or Dutch auction. Its interesting to note how much of our life is influenced by auctions. The Federal Communications Commission in recent years has auctioned off large parts of the electromagnetic broadcasting spectrum. The kind of television people will watch for the next few decades and the kinds of cellular phones they will use will be affected by this process and its outcomes. These auctions have already raised around 23$ billion in government revenue.

Auctions come in a large variety involving different methods for the submission of bids, for the determination of the identity of the winner, and of the final price paid by the winner.

Before the advent of electronic commerce, there were two commonly-used methods for submitting bids at an auction. In a sealed bid auction, buyers secretly write their bids on a piece of paper and seal them in envelopes before handing them in to the seller. In contrast in open outcry bidding, bidders call out their bids in public, a method which probably fits best the popular description of how the auctions work- where you see feverish bidders and an auctioneer.

There are also several methods by which auction prices are determined. The most common is for the highest bidder to pay the amount of his bid and take the item that is being auctioned. This is known as the first price auction. In contrast,in the second price auction the highest bidder buys the auctioned item at a price equal to the bid of the second highest bidder.

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