Nowadays, there are many types of auctions, which generate sales profits. On these trading floors, one sells various goods, including works of art, securities, and business property. With the development of technologies, today, auctions are also held on the Internet, where anyone can either put their goods up for sale or be in the role of a buyer. The adversarial principle, which is common to all types of auctions, plays an important psychological role. Thus, a person not only acquires a product but also becomes a winner in a competition. The winner is an individual who wins the bargain in accordance with the rules of the current auction, which are different for every type. The aim of this work is to compare and contrast different types of auctions, identify which type uncovers value better, and find out ways in which a company can use auctions to increase revenue.
The history of auctions dates back to ancient times, namely to 500 years before Christ. In those times, ancient Greek philosopher Herodotus described the brides’ auction. Since then, several types of auctions have developed, and the most popular are the English auction and the Dutch auction. Moreover, the art of auctioneering is the least understood one with various secrets (Business Insider, 2019). The English auction is the most widespread today, and it is an ascending price open auction (Chattopadhyay and Chatterjee, 2019). Thus, under such a trading model, the initial price is the minimum one. Further, participants bid up the price, and the bet is known for every person. Such an auction uncovers value by gradually increasing cost, thus, the more bids, the more value is. The aim of the auctioneer is to follow a catching voice tone and attract attention by body movements to keep the audience interested.
The Dutch auction is not as popular as the English one, however, it is used in some cases. This type of trading received its name due to wide dissemination in the Netherlands. The Dutch auction is an open descending price auction, and it begins its history in seventeenth-century flower markets (Chattopadhyay and Chatterjee, 2019). The lot is sold for the person who agrees on the lowest offered price by the auctioneer. The feature of this auction is that it is a wholesale auction, thus a person may sell several goods at once. Such an auction reveals the value of the goods by setting a lower bound on the participants’ value, although it is also the upper bound. Additionally, the participant must be the first to press the button in front of him to become the winner.
Further, the auctions also differ in how much the winner will pay if he wins the auction. For example, in a sealed-bid first-price auction, the winner will pay the price he named. In contrast, in an SPSBA (sealed-bid second-price auction), the buyer will pay less what one bid, namely the second-highest cost (Maschler et al., 2020). Accordingly, the participants of a sealed-bid first-price would probably submit lower proposals than the sealed-bid second-price auction’ buyers (Maschler et al., 2020). Thereby, sealed-bid first-price auctions uncover the actual value of the good as participants would not submit the overpriced bet. It explains the expediency of both types of auctions, as one would expect that the only profitable way of selling products is due to the highest price, not to the second-highest.
However, experience shows that Vickrey auctions or sealed-bid second-price auctions are as profitable as other types. It is one close round auction, where, as it was already mentioned, the winner is the individual who named the highest bid, however, one will pay the second-highest cost. Close auction constitutes participants’ unawareness of each other’s bids, and strategically this type is similar to English auction by stimulating the participants to pay the true cost. Moreover, the expedience of Vickrey auctions is formulated by maximizing utility due to participants calling genuine individual good assessment (Yue et al., 2017). It is included in a list of limitations used in Vickrey auctions, namely the inability of buyers to conduct price research. In addition, under such conditions, participants are vulnerable to dummy bids by sellers to increase their income.
Further, it is worth mentioning some economic concepts such as surge pricing and congestion pricing. These two concepts share the same principle, although they work in different ways. The general principle is to charge additional fees for increased demand for a service. However, in the case of surge pricing, it occurs in the form of a dynamic price increase. For example, Uber raises prices on Christmas Eve, as there is an increased require, and in order to maintain a balance between supply and demand, it is necessary to raise tariffs. It happens not only because of the desire to earn more money but also as the raised demand formulates an increased expenditure of resources to satisfy it. In the case of Uber, it includes the cost of gasoline, increased wear of consumables (tires, gears, etc.), and the driver’s physical condition.
An interesting fact is that one may draw some analogy between surge pricing and an English auction. Thus, the main principle of an auction with ascending price is an increase in demand for a lot with each higher offer (Business Insider, 2019). Thereby, raised demand creates an increase in prices, which is the main principle of surge pricing. In fact, every higher bid in an auction is not just a buyer’s desire to buy a certain product. It also automatically increases the require for this lot since the demand is equal to the product’s price. Thus, it is a cyclical process: the higher demand, the higher price, and vice versa.
Congestion pricing is similar to surge pricing, although it has a different principle of operation. An example of congestion pricing, which is currently in use, is the collection of tolls on overfull roads. Correspondingly, like surge pricing, raised demand formulates a price increase. However, there is no dynamic aspect, one has set the toll, and usually, it is fixed and valid for a long period. Generally, the fee is charged for excess demand, and in the case of road, it is constituted by the rapid wear of the track, and the necessary finances for its repair.
Nowadays, different types of auctions are widely used around the world in a variety of fields. One uses auctions in finance, e-commerce, e-games etc, moreover, they have become available to everyone by Internet. For instance, the Treasury bill auction in the United States, conducted by the Department of the Treasury through the Federal Reserve Bank of New York, is performed under the Dutch auction (Chattopadhyay and Chatterjee, 2019). An example of an e-commerce auction might be those that allow you to put your goods on a special Internet platform. Such products may include works of art, ideas, scientific works that appear of good quality. The most famous example of an e-game auction seems to be auctions held on dedicated websites. Usually, lots are skins for a game weapon or a character, in other words, its appearance. In addition, lots can be any in-game items that have value. For the last two examples, the English Auction is usually used.
Talking about the need for an auction to uncover value in the product or service, one may identify its advantages for every type. Firstly, as already indicated, the main principle of any auction is to win due to the best offer (Business Insider, 2019). Thus, there is an element of competition in any type of auction, which plays an important psychological role. Sometimes, it can affect the sale of a lot at a price higher than it actually has: for example, when a buyer gets excitement and desire to win. Moreover, each person may have their own ideas about the true value of the product. At the same time, knowing that the lot is valuable, the value of the product will be fully revealed due to the gradual increase in price.
After analyzing each type of auction, one may conclude that English one used to uncover the value of the product or service is better at uncovering value than other types of auctions. It is primarily due to the fact that the main principle of the English auction is an open ascending auction (Chattopadhyay and Chatterjee, 2019). Therefore, its advantage is that the price will only rise, moreover, there are no restrictions. In comparison, the Dutch auction implies a price reduction to a certain level (Chattopadhyay and Chatterjee, 2019). In other words, one cannot predict how high the price per lot in an English auction will be. It gives the main advantages of the English auction over others.
Talking about the advantages of auctions as revenue generators for not-for-profit organizations, one may distinguish several of them. The main advantage is the ability to earn money needed for further development quickly. Additionally, in online auctions, buyers have access to hundreds of lots at once, which gives them a wide choice (Yue et al., 2017). Considering that non-profit organizations usually have limited funding from the government, auctions become an effective way to support the company’s financial foundation. The only disadvantage of auctions as profit generators for non-profit organizations seems the necessity of performing many procedures. They include the preparation of the proper documentation, conducting an accounting, and performing the auction itself.
Considering my desire to work in Apple company in the future, one may propose ways to uncover value better using auctions or dynamic pricing. As already indicated, dynamic pricing is based on price increase based on demand. In other words, given the high demand for Apple products, one can suggest the company to increase the price of products by 2-3%. It will constitute the principle of dynamic pricing, moreover, in the event of a fall in demand, one will have to lower the price to the initial level. Speaking of auctions, an English auction for exclusive items (such as collectible rare-metal iPhones) seems to be profitable.
Consequently, it was found out that auctions are complex and profitable processes. The main principle of the auction formulates it: namely, the competitive moment. Additionally, two popular types of auctions were compared: English and Dutch ones. Further, it was identified that the English auction seems to be more useful in the context of uncovering value. Moreover, one was able to develop some tips for the company on how to unleash better value and income using an auction.
References
Business Insider. (2019). How to sell multimillion-dollar art at Christie’s. [Video]. YouTube.
Chattopadhyay, S., & Chatterjee, R. (2019). Understanding auctions. Routledge.
Maschler, M., Zamir, S., & Solan, E. (2020). Game theory. (2nd ed.). Cambridge University Press.
Yue, W., Li, Q. L., Jin, S., & Zhanyou, M. (Eds.) (2017). Queueing theory and network applications: 12th International Conference. (pp. 180-199). Springer.