Dutch auction
Dutch auction
A Dutch auction is one of several similar types of auctions for buying or selling goods. Most commonly, it means an auction in which the auctioneer begins with a high offer price in the case of selling, and lowers it until some participant accepts the price, or it reaches a set reserve price. This type of price auction is most commonly used for goods that are required to be sold quickly such as flowers, fresh produce, or tobacco. A Dutch auction has also been called a clock auction or open-outcry descending-price auction. This type of auction shows the advantage of speed since a sale never requires more than one bid. It is strategically similar to a first-price-sealed-bid-auction.
History Herodotus relates an account of a descending price auction in Babylon, suggesting that market mechanisms similar to Dutch auctions were used in ancient times. Descending-price auctions were used in 17th-century Holland for estate sales and paintings. The Dutch manner of auctioning appeared in England by the 17th century, which was called "mineing". In that type of auction, said to be a "Method of Sale not hitherto used in England", the auctioneer began with a high price that was sequentially reduced until one bidder cried out "Mine!" The Times mentioned a Dutch auction in 1788.
Auction process Before the auction commences, the auctioneer presents information about the objects sold to bidders. This information is displayed on a clock or electronic device in front of the site.
A Dutch auction initially offers an item at a price in excess of the amount the seller expects to receive. The price lowers in steps until a bidder accepts the current price. That bidder wins the auction and pays that price for the item. For example, a business might auction a used company car at a starting bid of €15,000. If nobody accepts the initial bid, the seller successively reduces the price in €1,000 increments. When the price reaches €10,000, a particular bidder—who feels that price is acceptable and that someone else might soon bid—quickly accepts the bid, and pays €10,000 for the car.
Dutch auctions are a competitive alternative to a traditional auction, in which customers make bids of increasing value until nobody is willing to bid higher.
Effect on stakeholders ### Auctioneer's revenue The speed of the clock used in the Dutch auction has a significant effect on final prices and the auctioneer's revenue. A fast Dutch clock has been found to yield significantly lower bids and seller revenue when benchmarked against a first-price-sealed-bid-auction. On the contrary, a sufficiently slow Dutch clock is found to be more profitable than a first-price auction.
In the case in which two or more bidders are participating in a Dutch auction, bid reductions should be increasing. Furthermore, the auctioneer's expected revenue should increase when the number of participants in the auction rises and number of bid levels increases. This expectation is because bidders already have bidding preferences but insufficient time to change their preference and as such, typically act in accordance with their first plan.
Bidder's emotion In Dutch auctions, bidders are unable to view other participants' bids; they can only view the winning bid. This leads to participants experiencing greater uncertainty when assessing the competitive dynamics of the Dutch auction. When losing, participants experience a stronger emotional response compared to when winning. This can be attributed to the instant-win feature of Dutch auctions. The winner is aware and assured of winning the auction and paying the winning price, whilst losing comes abruptly and as a surprise for the remaining participants. It has been suggested that improved efficiency in the IPO market is more likely to be felt in larger, already publicly listed companies, as buyers are typically hedge funds or mutual funds. As such, the market has already priced their shares and an indication of issue size already exists. The purchase price is the lowest price that allows the firm to buy the number of shares sought in the offer, and the firm pays that price to all investors who tendered at or below that price. If the number of shares tendered exceeds the number sought, the company purchases less than all shares tendered at or below the purchase price pro rata to all who tendered at or below the purchase price. If too few shares are tendered, then the firm either cancels the offer (provided it had been made conditional on a minimum acceptance), or it buys back all tendered shares at the maximum price.
eBay ascending uniform-price mechanism Rather than implementing a traditional Dutch auction, internet auction and e-commerce site eBay formerly (until 2009) offered a multi-quantity listing style. This allowed a person to bid by specifying a price and quantity collectively. This Dutch auction mechanism has been referred to as ascending uniform-price "Dutch" auction.
The units were sold per the price and quantity bidden that added up to the highest overall value. Each individual bidder paid the price of the bidder with the lowest winning price. However, they all were guaranteed the quantity they demanded in their original bid. This has been criticised in literature as not being a Dutch auction, because Dutch auctions guarantee not the price but rather the quantity demanded by a bidder.
Slow Dutch auction Dutch flower auctions are considered to be a particularly fast auction form with particularly low transaction costs, and they use an electronic device to lower the price. Sometimes, slower processes such as the bargain basement of Filene's Department Store in the USA, during which the discount on goods was increased over time until the goods were sold, are considered Dutch auctions. When faced with a positive cost of returning to the auction site, buyers prefer to purchase the object sooner (at a higher price) to economize on the cost of return. Therefore, when transaction costs are accounted for, Dutch auctions yield, on average, higher revenue than sealed-bid auctions. Holding electronic auctions reduces transaction costs substantially by relaxing physical and temporal constraints. In many cases, electronic markets enable competition in markets where competition was not possible before. Compared to the traditional dutch auction method, hybrid dutch auction comprises several stages consisting of: * In the first stage, namely the classic dutch auction, the item's value continues to decrease gradually by 1%. If it has reached the minimum threshold price and no bidders putting offers, the first stage is declared complete. * The second stage is a sealed bid uniform price auction. The winner of the first stage has the option to no longer participate in the second stage of the auction. In addition, the winner's price in the first stage is used as a minimum price and bidders bid privately, where bidders do not know the prices each other is bidding on. The second stage winner is taken from the bidder with the highest bidding price. * In the final stage, the winner of the first stage auction may bid again at 10% higher than the second stage winner. If the first stage auction winner is willing to do this, he is the winner of hybrid dutch auction. But, if he cannot do this, the second stage winner is the winner of hybrid dutch auction.
The purpose of establishing the hybrid dutch auction is to overcome problems in the traditional dutch auction, which can lead to collusion and excessive payment. Auctioneer initially setting the highest price, and the bidders must bid lower the initial price until both the auctioneer and bidder reach an agreement. Collusion happens because bidders are able to collude in determining the price. Hybrid dutch auction reduces the probability of collusion and cartel by providing a minimum price limit, and the winner is drawn from the highest price bidder. In addition, in second stage auction, where the first stage winner has the ability to not take part in the second stage auction, he is able to increase his bid in the last stage. This action can increase the seller's profit. A hybrid dutch auction is also able to maintain the stability of the item price and gives benefit to both auctioneers and bidders.