Online Auctions - Dutch auction

A Dutch auction is a type of auction where the auctioneer begins with a high asking price which is lowered until some participant is willing to accept the auctioneer’s price, or a predetermined reserve price (the seller’s minimum acceptable price) is reached. The winning participant pays the last announced price. This is also known as a “clock auction” or an open-outcry descending-price auction.

This type of auction is convenient when it is important to auction goods quickly, since a sale never requires more than one bid. Theoretically, the bidding strategy and results of this auction are equivalent to those in a sealed first-price auction. The Dutch auction is named for its use in the Dutch Tulip Craze.

In a Dutch auction, a seller offers up an item for bid at a very high price. The initial price is much higher than the item’s value usually and no seller expects to get that price for the item. Because bidders must know the amount of the bids, bids are not sealed as they are in some types of auctions. The price is lowered in increments until a bidder chooses to accept the current price. He pays that price for the item as the winner. For example, if a business is auctioning off a used company car, the bidding may start at $15,000. The bidders will wait as the price is lowered to $14,000 to $13,000 to $12,000 to $11,000 and to $10,000. When the bidding reaches $10,000, Bidder A decides to accept that price and, because he is the first bidder to do so, is considered the winner and has to pay $10,000 for the automobile.

One of the only problems with Dutch auctions has nothing to do with the auction logic itself but with a common area of confusion. The financial world and some third-party auction sites use the term “Dutch auction” when they refer to second price auctions. In truth, there is a huge difference between the two types of auctions. Second-price auctions are auctions in which the winners pays either the price of the lowest winning bidder or the price of the highest losing bidder. The confusion in the terms can be problematic for individuals interested in getting involved in either type of auction, so it is important to clarify which type of logic will be used before participating.

Depending on what individuals have to sell and how much money they hope to earn as a result of a successful auction, Dutch auctions can be an ideal alternative to more traditionally used approaches. The descending-price structure of these auctions increases competition among bidders and makes acting fast a necessity.