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Handbook > Auctions > Types of Auctions > First Price Sealed-Bid Auction Printer Friendly

First Price Sealed-Bid Auction

In a first-price sealed-bid auction, each bidder submits a sealed bid to the seller (that is hidden from other bidders). The high bidder wins and pays his bid for the good. Generally, a sealed-bid format has two distinct parts--a bidding period in which participants submit their bids, and a resolution phase in which the bids are opened and the winner determined.

When multiple units are being auctioned, the first-price sealed-bid auction is refered to as a "discriminatory" auction because not all winning bidders pay the same amount. It works as follows. In a discriminatory auction (more than one unit for sale), sealed bids are sorted from high to low, and items awarded at highest bid price until the supply is exhausted. The most important point to remember is that winning bidders can (and usually do) pay different prices.

Bidding

It is obvious that in a first-price sealed-bid auction, a bidder always bids below her valuation for the item. If she bids at or above her value, then her payment equals or exceeds her value if she wins the auction, and therefore her expected profit will be zero or negative. Since bids are below bidders' values, the first-price sealed bid auction is not a demand revealing mechanism.

In a first-price sealed-bid auction, there is no sequential interaction among bidders. Bidders submit the bids only once. Bidders are trading between bidding high and winning more often, and bidding low and benefiting more if the bid wins. It can be shown that a symmetric Bayesian Nash Equilibrium in the first-price sealed-bid auction with risk neutral bidders is that every bidder bids the expected highest value among their rivals, conditional on the bidder's own value being higher than all of the rivals' values.

The first price auction is strategically equivalent to the Dutch auction. Unlike in the second-price and English auctions, it is not a dominant strategy in a first-price auction to bid your value. However, the theoretically optimal bidding strategy in both first-price and Dutch auctions is the same for any given bidder.

In a first-price sealed-bid auction, it is advantageous for a bidder to gather information about the competing bids before deciding on his own bid. Therefore, the "privacy" issue is essential in this auction format.

Uses

This type of auction is used for refinancing credit and foreign exchange. The U.S. Treasury uses the discriminatory auction to sell most of the treasury bills, notes, and bonds that finance the national debt of the United States.

The first-price sealed-bid auction has been used in Japan to sell dried fish. It works as follows: Bidders deposit their bids in a box which is then handed to an auctioneer. After some agreed-upon time interval has expired, the auctioneer announces the winner.

The first-price sealed-bid auction is also used to award construction contracts. However, there is a difference. In a sealed-bid auction awarding a construction contract, the bidders are sellers rather than buyers. Therefore, the winning bid is the lowest bid. Please see procurement auction.

The Swiss auction is a variation of the first-price sealed-bid auction. What is unusual about the Swiss auction is that though the bid itself may not be modified, the winner can choose whether to accept or refuse the item. The name "Swiss auction" comes from the use of this auction by the Swiss construction industry to award contracts. Architects argue in favor of this auction technique because timetables and specifications nearly always require modification and there is no point in working with a contractor who doesn't want a certain job.

Software

Readings

Kagel, J. H., and D. Levin, 1993. Independent Private Value Auctions: Bidder Behavior in First, Second and Third Price Auctions with Varying Numbers of Bidders. Economic Journal, 103: 868-879.

 
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