An auction is an event for selling products to buyers where the buyers give competitive bids on services or assets. This form of transaction is famous because every buyer can buy or sell their assets based on their financial muscle. In an open auction, the buyers resent themselves at an online or physical platform to bid on the subject assets, and they raise their bids until a winner gets declared. In a closed format, the interested buyers present their sealed bids for assets on sale to their seller. The seller is the only party that knows the amounts on the proposals, and they choose the most favorable bidder as the winner of the asset being bought. Auctioning has been used for a long time and has, over the years, evolved into different forms (Malekovic et al., 2020). This paper seeks to explain this trading phenomenon by comparing oral and second-price auctions and applying expected value information. Besides, it will analyze the effect of the number of bidders on the outcome of auctions and the conditions required for price discrimination auctioning.
First and foremost, auctions as a means of trading are common in the technology sector, agriculture, the motor industry, and many more because of the chance for someone to buy an expensive tool or machine at a low price. Their popularity is also based on their ability to fetch high prices for sellers and set the price for selling similar products in a particular market. One of the forms of auctioning applied in different markets today is oral auctions, also knowns as English auctions. Oral auctions are when the bidders place their bids on certain assets on sale and then keep increasing their bids until they are only one bidder remaining with the highest bid (Loyola, 2021). Here the bidders can shout the prices they are willing the product at or fill an automated machine that submits the bids electronically. The highest bidder bags the asset being auctioned by the seller. For instance, five bidders hope to win a Subaru SUV in a display shop with bids at $1000, $6000, $4000, $2500, and $1500 (Loyola, 2021). In this case, the winner would be the individual bidding $6000. This type of auction is a form of an ascending bid auction.
On the other side, there is the second price type of auction. This form of auctioning, also referred to as a Vickrey auction, is one where the auction is sealed and the item being auctioned is awarded to the highest bidder. The difference between this form of auctioning and the oral type of auction is that the price taken for the product being sold is the one that the second-highest bidder offered. This auctioning encourages the bidders to place aggressive bids as they know that is not what they will pay for the product (Malekovic et al., 2020). For instance, if the first and winning bidder placed the price for a wooden lantern to be $600 while the second-highest bidder’s price is $500, the individual providing $600 wins the item but pays $500. Therefore, oral and second-price auctions on a good day bring huge sales to the sellers, but it is safe to say that second-price auctioning is the best because many people fall for the highest bid trap and bid aggressively, meaning they place high prices.
Another critical area to understand regarding auctioning is the expected value information and its effect on the auction outcome. The expected value information is the information on the price that individuals in an auction may be willing to bid to win a particular item. The expected value is the anticipated value of that product. In an auction, the price of a product is set through bidding based on the expected value information. The buyers keep bidding on the price they perceive for the item. Research has shown that having many bidders is beneficial when oral auctions are involved. When several bidders are involved, the bidders will compete to have the best price for the product in question. In doing all this bidding, the bidders bid aggressively, and as a result, the product’s price rises exponentially until only one person can go further (Koska and Stähler, 2021). Research shows that the price of an item in an auction increases simultaneously with the number of asymmetrical bidders when there are synergies. This fact is contrary to service providers because the sellers of services are looking for the lowest price possible. For instance, if an individual is interested in a tender to offer a certain service, the individual will be hoping to have many bidders for them to bid lower prices. Lower prices in the service industry indicate a low production cost and high returns.
Apart from the forms of auctioning discussed above, common value auctions come with a whole new set of risks for the buyers. In a common value auction, all bidders know the value of the product they want to buy and hence have to come up with new elements to add to the auction to win the product or service. The exciting part is that buyers do not know the value of the product they are bidding at that time. Instead, the buyers get signal values affiliated or correlated with the item’s value. This aspect leaves the bidders to analyze and estimate the item’s value based on individual signals. An excellent example of such auctions is the mineral rights tendering process, where bidders purchase a product based on qualities other than prices, such as resale and investment. Here, the products’ value is identical to all sellers, but the buyers have different data on the item’s value. This type of auction is different from private value auctions, where the bidders have different product valuations.
Additionally, since in common value auctions, bidders equally know the value of the item, intuition has it that increasing the number of bidders increases the probability of the ‘winners curse.’ The winner’s curse is the probability that the individual who gets the auction will pay more than the standard rate. This aspect is because common value auctions increase the likelihood of an individual overestimating the challenges and problems they will encounter and increasing aggressive bidding by bidders (Koska and Stähler, 2021). The number of people bidding in an auction is critical because it can affect the auction outcome. In most cases, increasing the number of bidders in an auction works well for the firm conducting the auction as it gets the best deal. In contrast, increasing the number of bidders in auctions, such as those in the service sector where someone was to build a certain structure or something because it, exposes the winner of the tender or auction to harm. On the other hand, decreasing the number of bidders decreases the losses associated with winning the auction.
In complementary, the auction outcome affects the price differently in different market structures. The higher the number of bidders in the construction and service industry, the higher the losses because each bidder will provide the best price to make more profits. This way, there is a chance that the winner is the one in the smallest bid. With a small bid, the construction process faces many problems and losses. On the side of the sector such as the agricultural sector, where sales such as cows and crops are sold through auctions, the higher the number of sellers, the high the chance of getting the product at a lower price which is critical for profits. Hence the number r of bidders as a factor in price determination plays a varied role based on the type of economic sector.
Lastly, at the end of any auction, there is always a winner, and the winning price becomes the price of that product. When getting a winner of a particular product through auctioning, the buyers reveal their prices which the auctioning company can use to determine the prices of different products and services. Auctioning allows firms to do price discrimination, which increases their profits extensively. Companies rely on the revelation of value for products by buyers to set their prices and apply the fees in price discrimination. Price discrimination is selling similar products and services at different prices by the seller. In a pure price discrimination environment, the seller charges the absolute price the buyer is offering to pay, even if it is way more than the profit margins they anticipated. However, price discrimination does not just occur. Price discrimination is applied in many business areas through discounts, coupons, premium pricing, incentives, and financial aid.
Some factors are necessary for any company to price discriminate its products for maximum profits driven by supply and demand. One of the conditions required for price discrimination in a firm is the presence of market power. The firm should hold a huge junk of the market. For instance, any firm with a considerable market share will always detect market forces such as price like a monopoly. Thus it can sell at a high price than others. Besides, the firm should have separate markets for its products. For instance, the firm should be able to separate its market to prevent reselling of the products. Apart from that, the firm that wants to price discriminate must have a low administration cost (Bonatti and Cisternas, 2020). With the low cost of the product, the firm can break even fast and be in a position to sell at a high price without worrying about the consequences.
In conclusion, an auction is one of the best business transactions applied in commerce. For an individual to benefit from it, they must understand the tenets of auctioning, such as the types of auctions and their differences. Besides, there is the comparison between oral and second-price auctions, the application of expected value information, the effect of the number of bidders on the outcome of auctions, and the conditions required for price discrimination in auctioning. With such data, anyone can conduct a successful auctioning process.
References
Bonatti, A., & Cisternas, G. (2020). Consumer scores and price discrimination.The Review of Economic Studies, 87(2), 750-791. Web.
Koska, O. A., & Stähler, F. (2021). It ain’t over until it’s over: English auctions with subsequent negotiations. International Review of Economics & Finance, 72, 121-124.
Malekovic, N., Goutas, L., Sutanto, J., & Galletta, D. (2020). Regret under different auction designs: the case of English and Dutch auctions.Electronic Markets, 30(1), 151-161. Web.