An absolute auction is a type of auction in which the item being sold is guaranteed to be sold to the highest bidder, regardless of the final bid price. This is in contrast to a reserve auction, in which the seller sets a minimum price for the item and only sells it if the bid meets or exceeds that price. Absolute auctions are typically used for real estate and other high-value items, and are often used to quickly and efficiently liquidate assets.
Strengths of absolute auction
There are several strengths of absolute auctions:
- Certainty of sale: Since the item is guaranteed to be sold to the highest bidder, both the seller and potential buyers can be sure that the sale will take place.
- Fairness: Absolute auctions ensure that all bidders have an equal opportunity to purchase the item, which can help to prevent collusion or other unfair practices.
- Speed: Absolute auctions can be completed quickly and efficiently, which can be beneficial for sellers who need to liquidate assets quickly.
- High competition: Absolute auctions can generate high competition among bidders, which can lead to a higher final bid price for the seller.
- Transparency: Absolute auctions are open to the public, which can increase transparency and trust in the auction process.
- Low transaction costs: Absolute auctions do not require the seller to pay a commission to an auctioneer, and the costs of the auction process can be minimal.
- Maximize value: Absolute auctions offer the potential for the seller to maximize the value of their item, by letting the market determine the fair value of the item.
Absolute auction limitations
Limitations of absolute auction are:
- Risk of underselling: Since the item is guaranteed to be sold, there is a risk that the final bid price may be lower than the item's true value.
- Limited control: The seller has limited control over the final bid price and the buyer, which can be a disadvantage if the seller has specific requirements for the sale.
- No "cooling off" period: Unlike reserve auctions, absolute auctions do not typically include a "cooling off" period during which the buyer can change their mind and cancel the sale.
- Lack of privacy: Absolute auctions are open to the public, which can make it difficult for sellers to keep the sale of certain items private.
- Risk of a low turnout: Absolute auctions require a large number of bidders to generate competition and increase the final bid price. If the auction does not attract enough bidders, the final bid price may be low.
- Limited market reach: Absolute auctions may not reach a global market and are dependent on the local market.
- Not suitable for every type of item: Absolute auctions may not be suitable for certain types of items, such as those that are difficult to value, or that have a small pool of potential buyers.
Other types of auctions
Example other types of auctions are:
- Reserve auction: In a reserve auction, the seller sets a minimum price for the item and only sells it if the bid meets or exceeds that price.
- Dutch auction: In a Dutch auction, the auctioneer starts at a high price and gradually lowers it until a bid is accepted. This type of auction is often used for perishable goods, such as fresh flowers or produce.
- Sealed bid auction: In a sealed bid auction, each participant submits a sealed bid, and the highest bid wins. This type of auction is often used for government contracts or other large-scale purchases.
- English auction: In English auction, participants bid openly against one another, with each new bid raising the price of the item. This is the most common type of auction.
- Vickrey auction: This is a type of sealed bid auction where the highest bidder wins the auction but pays the price that the second highest bidder bid.
- Reverse auction: This is a type of auction where buyers compete to obtain goods or services by offering the lowest possible price.
- Online auction: This is a type of auction that takes place over the internet, and is usually conducted through a website or mobile app.
- Jehiel, P., & Lamy, L. (2015). On absolute auctions and secret reserve prices. The RAND Journal of Economics, 46(2), 241-270.
- Mayer, C. J. (1995). A model of negotiated sales applied to real estate auctions. Journal of urban Economics, 38(1), 1-22.
- MIAO, C. H. (2013). On the superiority of fixed fee over auction in technology licensing. The Manchester School, 81(3), 324-331.