Auctions: theory, mechanisms, and applications

An auction is defined as an economic means that involves allocation of goods and creation of prices for these goods through bidding. Through this process, bidders form the prices of goods based on their individual valuations. However, auctions are designed carefully to encourage bidders to express their valuations for the product while discouraging collusion or cheating in order to maximize revenues. According to McAfee (2017), an auction can be considered as a method of price discovery or determining what an individual will pay for a product and who will get it. Auctions have existed for a long period of time and in different kinds depending on the specific goals of this economic mechanism. This paper examines different kinds of auctions as price discovery mechanisms and their use in different situations.

English and Dutch Auctions vs. Sealed-bid First Price and the Vickery Auctions
There are various kinds of auctions that are applicable in different situations as price discovery mechanisms. These different types of auctions differ in strengths and weaknesses at identifying the real price or value of a product/item. The four most common types of auctions are English auctions, Dutch auctions, sealed-bid first price auctions and the Vickery auctions. English auctions and Dutch auctions are similar in the sense that the bids are public announcements. However, they differ on the premise of how the bidding is done for valuation of the item. Bidding in English auctions use Open Ascending Price Auction in which the bid price increases until there are no further bids. Once the highest bid has been established and there are no further bids, the highest bidder is considered the winner and pay his/her bid. On the contrary, Dutch auctions, which are common in Europe use Descending Price Auction in which the bids start at the highest price than the initial value of the product/item and decreases until a bidder makes a call. In this case, the first bidder to make the call is the winner and pays that price.
Sealed-bid first price auction differs from English auctions and Dutch auctions in the sense that bids are private information that are made simultaneously. Unlike the other types of auctions, the bidder writes his/her bid and submits it to the auctioneer. The auctioneer opens all the bids simultaneously and the highest bid wins (McAfee, 2017). The Vickery Auction is also known as sealed-bid second price auction in which bids are private information like the sealed-bid first price auction. While the bids in the Vickery Auction are made simultaneously like sealed-bid first price auction, the highest bidder wins but pays the second highest price.
Recommendation for Concierge Auctions Limited
Concierge Auctions Limited is an auctioneering company that sells very high-end and unique properties across the globe. The company uses an English style auction through which it sells the properties to the highest bidder. While the company has remained successful over the years, it has been embroiled in several lawsuits. The multiple lawsuits are based on allegations that the company drums up fake bidders (Clarke, 2019). The company’s use of an English style auction has contributed to its success, but also resulted in these multiple lawsuits. These types of auctions have enabled the company to receive highest bids since the bid prices increases during the auction. However, English style auctions are characterized by some weaknesses, which could have resulted in the challenges facing company. The weakness of this type of auction is that it could contribute to low valuation of an item than it’s real value. In essence, English auction could make result in the sale of a property for a price that is low than its value if bidding is slow.
Given this weakness, Concierge Auctions Limited should consider using an alternative type of auction in order to better uncover the value of unique real estate properties. Dutch auction style could be the most suitable type of action for uncovering the actual value of unique real estate properties. This is primarily because Dutch auctions begin at higher prices than the original value of the item. Through this process, the company would ensure that the bidding begins at the highest prices and decreases until no other bids are placed. Using this auction style, Concierge Auctions Limited could end up selling a property for a price that is higher than or equal the value of the property.
Auctions in Finance, e-Commerce and e-Games
Auctions are widely used by companies in e-commerce, finance, and e-gaming industries. The use of this price discovery mechanism is influenced by various factors, particularly the need for an auction in the product or service. One of the uses of auctions in e-commerce is when identical or similar goods are available in huge quantities. Companies in e-commerce industry use auctions to promote the sale of their goods in such situations. Efficient dynamic auctions are the type of auctions used in such instances. Using this type, the auctioneer or company announces a price and bidders respond by stating the desired quantities. The auctioneer then increases the price and the bidders respond by stating their desired quantities and the process goes on until aggregate demand is lower than or equal to supply is achieved. This type of auction is effective for such products since it enables the firm to sell large quantities of products at reasonable prices (Ausubel, 2001).
Secondly, firms in e-commerce, finance and/or e-games industries use auctions to obtain the highest prices for their products or services. These firms use auctions to sell their products or services for prices that are equal or exceed the value of the product/service. This is particularly used for unique products provided by multinationals worldwide. In such situations, these firms use English style auctions where bidders place their bids on the electronic platforms depending on their valuations for the product/service. This bids are visible to others and are modified by the bidders as the auction continues. The process continues until no new bids are placed within the auctioneering period. This type of auction is suitable for such products since it enables the company to sell them for high prices due to their uniqueness.
Third, auctions are used in these industries to sell multiple products or service simultaneously. When companies in these industries have multiple products or services, they use auctions to sell them simultaneously. Dutch auctions are used since they enable the company to provide the multiple products to bidders until all items are sold. The process begins with offering the product/item at a higher price, which decreases until a bidder makes a call. This process continues until all items are sold during the auction period (Fine, n.d.).
Auctions in Not-for-profit Organizations
As price discovery mechanisms, auctions are also commonly used by not-for-profit organizations to generate revenues. While these organizations do not engage in for-profit activities, they generate revenues for their effective operations. This implies that auctions are efficient tools for not-for-profit organizations to create fun events or activities that generate money/revenues with minimal initial investments. The use of auctions in the non-profit world is associated with some advantages and disadvantages.
One of the advantages of using auctions as revenue generators for non-profit organizations is they help raise extra funds for effective operations. Not-for-profit organizations usually deal with limited funding from partners, grants or the government. The limited funding implies that they need to generate more money to enhance their effectiveness. Auctions help these organizations to raise additional funding with minimal initial investments. Secondly, auctions help enhance awareness of the organization to the public and potential new donors. This in turn enables the firm to gain new donors or partners by creating awareness of the organization and its operations. On the contrary, one of the disadvantages of auctions are revenue generators for these organizations is the complexities involved in planning such events. Since these organizations engage in non-profit activities, planning an auction could be a complex process that affects their operations. Secondly, auctions in the non-profit world are associated with risk management concerns since they have to accommodate different kinds of people including those with disability. This could prove to be daunting task that in turn affects the effectiveness of the auction process for the not-for-profit organization.
Using Auctions to Better Uncover Value and Increase Revenue
Companies can use auctions to better uncover value and increase revenue given the potential of auctions as revenue generators. One of the ways the company I aspire to work for can use auctions to enhance value and generate more revenue is through silent auction. Silent auction help to better uncover value or increase revenue by enabling bidders to place their bids depending on their individual valuation of a product/service without being influenced by others’ valuation. Secondly, the company should adopt a simple sequential mechanism for its auctions since it generates substantial higher profits than simultaneous bids (Roberts & Sweeting, 2012).
In conclusion, auctions are price discovery mechanisms that help generate revenues for companies and non-profit organizations. Auctions provide a mechanism for organizations to offer certain products/services to bidders who place different bids based on their valuations of the products/services. English auctions, Dutch auctions, sealed-bid first price auction, and the Vickery Auction are the four most commonly used types of auctions. These different kinds of auctions are used in different situations and are associated with different strengths and weaknesses with regards to uncovering value and increasing revenue. Companies need to examine different situations before determining the most suitable type of auction to utilize for their product/service.
References
Ausubel, L. (2001). Auctions for Financial E-Commerce. Retrieved May 18, 2019, from https://www.newyorkfed.org/medialibrary/media/newsevents/events/research/2001/Fin-Ecommerce-Ausubel.pdf
Clarke, K. (2019, March 1). Luxury Real-Estate Firm Concierge Auctions Fights Allegations of Fraudulent Bids. The Wall Street Journal. Retrieved May 18, 2019, from https://www.wsj.com/articles/luxury-real-estate-firm-concierge-auctions-fights-allegations-of-fraudulent-bids-11549568689
Fine, L.R. (n.d.). Auctions. Retrieved May 18, 2019, from https://www.econlib.org/library/Enc/Auctions.html
McAfee, P. [Numberphile]. (2017, November 1). The Ideal Auction – Numberphile [Video file]. Retrieved from https://www.youtube.com/watch?v=4kWuxfVbIaU
Roberts, J.W. & Sweeting, A. (2012, August 9). When Should Sellers Use Auctions? Retrieved from University of Maryland website: http://econweb.umd.edu/~sweeting/SWEETING_usingauctions.pdf