This section looks at different forms of auctions. Different types of auctions have different bidding
behaviors. How a bidder will behave in an auction depends on the reason with which the bidder is
participating in the auction in the first place. One reason for participating in an auction
is that the bidder wishes to aquire the auctioned good for personal consumption. One can consider
a painting being auctioned and a buyer bidding on it for personal use. In this situation, the
bidder estimates his personal consumption value of the item, and no one other than the bidder knows what
that value is. It is probably useful to note that even the seller does not know the values that the bidders place on the auctioned item, since if he did he would just set the price equal to the highest valuation.
The other reason for participating in an auction is to resell the item or use it for commercial
use. In such a situation the bidder's valuation of the auctioned item is determined by his estimate
of the future resale value of the item. So the item is actually worth the same to all, however no one
actually knows what that common value is. Think of business houses trying buy a piece of land
to aquire mineral rights. Each has different information and different estimates of the future
value of this land and consequently would bid differently for it.
William Vickrey (1961) modeled four different types of
single unit auctions:
- English auction - This is the most familiar form of an auction; it is also known as an open outcry or an
ascending price auction. The type of auction is commonly used to sell wine, art, antiques, cattle, tobacco, and many other goods.
- Dutch auction - In the Netherlands, this form is used to sell produce and flowers, and hence the name.
This is also known as a descending price auction. In Zamibia they use this auction to sell fish. The
bidding starts at an a very high price and is progressively lowered until a buyer claims the item.
- First-price sealed-bid auction - The main distinguishing feature of this auction as the name suggests is that
the bids of individual bidders are sealed and not known to all, and thus hidden from all except the
bidder and the seller. In a buyer-bid auction, the highest bidder buys the item and pays the amount of his bid. In a seller-bid auction, the lowest bidder sells the item and is paid the amount of her bid. This form of auction is used for construction contracting, some military procurement and private-firm procurement, refinancing credit, foreign exchange, and many other goods.
- Second-price sealed-bid auction - Also known as the single-unit Vickrey auction. In a buyer-bid auction, the highest bidder buys the item and pays the amount of the second highest bid. In a seller-bid auction, the lowest bidder sells the item and is paid the amount of the second lowest bid.