Auction market

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Auction market
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Auction market is a type of trade where at the same time buyers enter bids and sellers enter offers. The trade price is the highest price that buyer is willing to pay, and the lowest price accepted by seller. Matching bids a paired and executed. Such an auction is very popular, as many stock-exchange markets work that way, e.g. NYSE.

Auction market works different to the over-the-counter, where are direct negotiations. During auction everything is done automatically, without any possibility of negotiations. Moreover, on auction market it is possible that multiple buyers and multiple sellers deal simultaneously. There is no restriction to one seller-multiple buyers model, as in traditional auction.

That form of auction is the most efficient, as it tries to satisfy the highest possible number of investors [1].

According to Financial Dictionary [2], is a "a market in which buyers and sellers gather to transact business through announced bid and ask prices. The organized securities exchanges are examples of auction markets. Compare dealer market, open outcry".

Auctions are really important part of many markets, for example markets for radio spectrum, timber, used industrial machinery, livestock, used cars, antiques, government-owned property, procurement, debt instruments, art, charity, and real estate. Economists have developed a lot of research, including theoretical and experimental nd empirical studies. Very big amount of this work was based on effects of different auction structures, comparing common designs such as English, Dutch, first-price sealed-bid and second-price auctions[3].

English Auction

At the beginning the auctioneer is posting a reserve price. If no buyer bids the reserve price, then no deal is done. When buyer bids the reserve price, bids are invited from the buyers, who must bid higher price than the current highest bid. When no buyer wants to raise the bid, the buyer who made the highest bid wins the object and pays the amount of his bid. Mostly English Auction is used to sell arts, antiques, wines etc.[4].

Dutch Auction

The auctioneer starts by asking for an false high price and next lowers the asking price by a small value until some buyer makes a bid equal to the current asking price. The buyer who made the bid wins the object and pays the price. It is used in Dutch flower market, Ontario tobacco market or fish markets in Zamibia[5].

First-Price Sealed-Bid Auctions

Bidders report bids to the auctioneer. In a buyer-bid auction, the highest bidder wins the auction and pays the price of his bid. In a seller-bid auction, the lowest bidder sells the object and is paid the amount of her bid. We are using this auction to invited tenders, construction contracting, military procurement and private-firm procurement, refinancing credit, London Gold Exchange, etc.[6].

Second-Price Sealed-Bid Auction (Vickrey Auction)

Bidders submit bids to the auctioneer. In a buyer-bid auction, the highest bidder wins the auction and pays the price of the second highest bid. In a seller-bid auction, the lowest bidder sells the object and is paid the amount of the second lowest bid. Usage is not as common as other auctions, but we can find it on eBay's proxy bidding and Google's AD auction use similar idea[7].

Footnotes

  1. Bapna, R., Goes, P., Gupta, A., & Jin, Y. (2004). User heterogeneity and its impact on electronic auction market design: An empirical exploration. Mis Quarterly, 21-43
  2. Financial Dictionary "Auction Market"
  3. Bid Takers or Market Makers? The Effect of Auctioneers on Auction Outcomes
  4. Auctions: Theory and Practice
  5. Auctions: Theory and Practice
  6. Auctions: Theory and Practice
  7. Auctions: Theory and Practice

References

Author: Maja Rogalska