Game Theory, Nobel Prize, & Auctions - Auction Primer Series ? Part 1

William Vickrey, highly regarded as the founder of auction theory, was an economics professor at Columbia University when he published two papers outlining his views on auctions:

"Counterspeculation, Auctions, and Competitive Sealed Tenders", 1961, Journal of Finance

"Auction and Bidding Games", 1962, Recent Advances in Game Theory

In 1996 he received a Nobel Prize "for fundamental contributions to the economic theory of incentives under asymmetric information." It's important to understand that asymmetric information is an essential component of auctions, where potential buyers have varying levels of knowledge about the value of the item.

Although Vickrey considered his work on auctions as "one of my digressions into abstract economics, at best of minor significance in terms of human welfare", to those of us who work with online auctions, much of what he outlined is useful to understanding our marketplace.

Vickrey identified 4 general types of auctions:

English
Dutch
First-price sealed bid
Second-price sealed bid

English Auctions
The most common type of auction is the English Auction, although it may also be known as an ascending price auction. In ascending price auctions each subsequent bid is higher than the previous one. This is the most popular type of auction for single items.

Although traditional ascending price auctions use a "soft close" format - where bidding continues until a final bid is placed, the majority of today's on-line auction sites use the "hard close" format - also known as a 'time interval" auction having a set time limit, regardless of ongoing bidding. It's important to note that in a "soft close" format, bid snipping, that is bidding during the last few seconds or minutes on an item, is eliminated since the auction stays open as long as bids are being made.

In an attempt to minimize bid snipping and provide more of a "soft close" characteristic to their "hard close" auctions, eBay allows bidders to use "proxy bidding". In proxy bidding, a bidder enters the highest price they are willing to pay for an item when they first bid. The bid begins at the lowest possible level and increases automatically only if their original lowest bid has been beaten. For more in-depth information on the "proxy bidding capability on eBay go here.

http://pages.ebay.com/help/buy/proxy-bidding.html

Amazon.com currently offers a feature for their auctions called "Going, Going, Gone." The Going, Going, Gone" feature extends the end of an auction for 10 minutes if a bid is placed effectively creating a "soft close". For more information on the "Going, Going, Gone" feature on Amazon go here. http://www.amazon.com/exec/obidos/tg/browse/-/1161360/103-1666189-8415007#going-gone

From the buyers standpoint a "hard close" format is preferable since they may be able to make a final bid before others can react, possibly winning the auction at a lower price.

For sellers, a "soft close" format provides an opportunity to realize the maximum price for an item by removing the time restrictions for an auction. As long as bidders are bidding the auction remains open.

Dutch Auctions
As you may have guessed, the concept of the Dutch auction originates in the Netherlands. Unlike English auctions which utilize ascending price methods, Dutch auctions are descending price auctions and are commonly used when multiples of the same items are to be auctioned. In a Dutch auction the bidding starts at a relatively high price which is driven progressively downward by bids.

As an example of a Dutch auction let's say you had 10 items you wanted to sell for $20 each.

Bidder A bids $18 for 6 items
Bidder B bids $17 for 5 items
The final result is:
Bidder A would receive 6 items for $17 each
Bidder B would receive 4 items for $17 each

Please note that most Dutch auctions allow bidders to refuse an order for a lesser number of items than what they bid on. A "soft" or "hard close" format may be used in Dutch auctions although the most common is the "hard close".

First-price Sealed Bid Auctions
Sealed bid auctions differ from the English and Dutch in as much as the bids are not announced to other bidders. The individual bid is only know to the bidder and the seller. This type of auction may be either buyer-bid, where the highest bidder wins the item and pays the amount of their bid, or seller-bid, where the lowest bidder sells the item and is paid the amount of the bid. This form of auction is common for construction contracting, military procurement, foreign exchanges, and other types of goods.

Second-price Sealed Bid Auctions
Another common name for second-price sealed bid auctions is Vickrey auctions (named after William Vickrey) There is a slight variation to the first-price auction for Vickery auctions. In a buyer-bid auction the highest bidder buys the item and pays the amount of the second highest bid. Or in a seller-bid auction, the lowest bidder sells the item and is paid the amount of the second lowest bid.

The above descriptions provide a general overview of the most popular auction types in use today. Depending on the auction website these general categories may include a number of variations and options such as reserve pricing, open or closed venue, multiple items, fixed price and lot listings to mention a few. Before entering any particular type of auctions make sure you study and understand the rules for that specific type of auction, as the rules may vary from website to website.

Copyright © Steven Woodward ? All Rights Reserved

Steven Woodward is the owner, editor and publisher of the Auction Sellers Network (ASN); a web site for individuals and companies who are serious about utilizing the online auction marketplace for their business. In addition to topical articles, ASN provides an extensive resource center, news feeds and member forums. For more information, or to become a member, please visit us at http://www.AuctionSellersNetwork.com

No permission is needed to reproduce an unedited copy of this article as long the About the Author tag is left in tact and included. We do request that we be informed of where it is posted and reciprocal links will be considered.

---

eBay and Dropshipping - A Perfect Fit!

eBay and Dropshipping go together like a hand in a... Read More

Ebay Auction Selling Secrets - Using Ebay to Launch Your Very Own Highly Successful Website

Launching your very own successful website is the dream of... Read More

Taxing eBay Part Deux

When my column on paying income tax on eBay profits... Read More

Royal Memorabilia ? An eBay Prince or Pauper?

There has always been a fascination with royalty and as... Read More

Get Yourself A Piece of The eBay Pie

Ebay is without a doubt the greatest internet marketing phenomenon... Read More

Four Huge Mistakes Ebay Sellers Make (Even Some Moderately Successful Ones)

No matter how many times I see it happening, I'mconstantly... Read More

Effective Auction Listings - How To Create Them

Once you've created the best possible title for your item,... Read More

Dropship Your Way to Success

Many people know they would like to start an Internet... Read More

How To Convert eBay Surfers into Bidders!

Do you know the phrase "A Call To Action"? Well,... Read More

How To Sell Internationally On eBay Without Risk

Many people just getting started on eBay have reservations when... Read More

Increase your eBay Profits the Easy Way

Sometimes the simplest things can boost the number of visitors... Read More

What To Do After Your eBay Auction Closes

So your auction closes. Now what?Hopefully you made a sale... Read More

EBay Feedback, 5 Key Things All EBayers Should Know

eBay's user feedback system is one of the site's most... Read More

Five Ways To Detect Shill Bidders On eBay So That You Dont Pay Absurd Prices

There is as a lot of buzz about shill bidders... Read More

From Ebay Zero to Power-Selling Hero: The Devil Is In The Details

If you've ever heard the expression "the devil is in... Read More

Auction Seller Guide To Success

When its time to clean-up around the house, some people... Read More

Bananas - Your Source of eBay Packing Materials!

This is the most boring stage of the process and... Read More

Doing It eBay: An eBay Business Means Fun and Profits in a Global Marketplace

In 1995, when Pierre Omidyar introduced an online business venue... Read More

Garage Sales, Flea Markets, and Special Events... Oh My!

The activity chart is an ingenious way to find, in... Read More

Louis Vuitton -- Avoiding the Ebay Nightmare Fakes

Without a doubt, eBay was one of the cleverest on-line... Read More

eBays Hot Selling Books, Find Out Which Books Sell & How To Find Them

Selling books on eBay can be a very lucrative business!... Read More

Dropshipping on eBay, Does It Work?

eBay offers any business owner a new global market to... Read More

eBay The Mega Marketplace For Everyone

eBay is one of the world's largest market places with... Read More

Before You Sell On Ebay, Take The Most Important Step

If you want to earn a full-time income selling on... Read More

Everything You Need To Know About Ebay Money Making Opportunities

Ebay money making opportunities are simply the best thing to... Read More

The Top Sellers On eBay & What We Can Learn From Them

A fascinating eBay case study is the number one seller... Read More

Do You Sell Tires By Mail? Maybe You Should eBay

I just received an interesting email from eBay and it... Read More

12 Tips To Make Your eBay Business More Profitable

Sometimes it's the simple things that can make your eBay... Read More

Online Auctions Business

Online auction sites are a great way to find a... Read More

Do You Pay Taxes On eBay Income?

Q: I read your last column about paying income tax... Read More

The Effects of eBay on American Merchandising

With one brilliantly simple idea, eBay was born just a... Read More

Royal Memorabilia ?Smart Trading and Fake Dodging

This is my second article about trading royal memorabilia on... Read More

EBay Income Possibilities

If you've ever read an article about eBay, you will... Read More