Auction Types -- English
-by Kate Reynolds
One in a Series of Articles from Agorics, Inc.
An important observation must be made before discussing the various auction formats and that is that people generally have one of two motivations for participating in an auction of any type. The first reason is when a bidder wishes to acquire goods for personal consumption (wine or fresh flowers), and in this case the bidder makes his own private valuation of the item for sale. All bidders have private valuations and tend to keep that information private. There would be little point in an auction if the seller knew already how much the highest valuation of an object will be.The second reason for bidding in an auction is to acquire items for resale or commercial use. In this case, an individual bid is predicated not only upon a private valuation reached independently, but also upon an estimate of future valuations of later buyers. Each bidder of this type tries (using the same measurements) to guess the ultimate price of the item. In other words, the item is really worth the same to all, but the exact amount is unknown. This is called a common-value assumption, and one example is that of art purchased solely for promotion in some secondary market. Purchasing land for its mineral rights is another example. Each bidder has different information and a different valuation, but each must guess what price the land might ultimately bring.
People's bidding behavior changes depending upon which motivation is driving them.
William Vickrey [Vickrey] established the basic taxonomy of auctions based upon the order in which prices are quoted and the manner in which bids are tendered. He established four major (one sided) auction types.
The English auction is the format most familiar to Americans and is known also as the open-outcry auction or the ascending-price auction. It is used commonly to sell art, wine and numerous other goods.
Paul Milgrom [Milgrom-1] defines the English auction in the following way. "Here the auctioneer begins with the lowest acceptable price--the reserve price-- and proceeds to solicit successively higher bids from the customers until no one will increase the bid. The item is 'knocked down' (sold) to the highest bidder."
Contrary to popular belief, not all goods at an auction are actually knocked down. In some cases, when a reserve price is not met, the item is not sold. (In other instances discussed later, an item is not really sold because a shill from the auction house has accidentally bought it.) Some states require the auctioneer to state at the conclusion of bidding whether or not the item has been sold.
Sometimes the auctioneer will maintain secrecy about the
reserve price, and he must start the bidding
without revealing the lowest acceptable price. One possible explanation for the
secrecy is to thwart rings (subsets of bidders who have banded together and
agree not to outbid each other, thus effectively lowering the winning bid).
Despite its seeming simplicity, this auction format is quite complex. Often bids are not made aloud, but rather signaled--tugging the ear, raising a bidding paddle, etc. This system of signaling has several advantages. First, an auction hall would be bedlam if voices were required. Audible bids increase the likelihood of error because there may be more than one person bidding at a single instant and an auctioneer cannot be expected to hear them all.
Many traders prefer the semi-anonymity--a known expert in a certain field may not want others to know he is bidding because it would probably increase the bidding interest. When a decision to accept signals is made, a system of price intervals must be introduced so that seller and buyer understand the signals. In certain situations, an auctioneer has wide discretion. In America the auctioneer often calls out the amount he has in hand and the amount he is seeking as well. In England, however, often the auctioneer does not lead bidders this way, but rather waits to be told what a bidder will offer.
Adding to the complexity, competition is at its highest in the English auction, with some bidders becoming carried away with enthusiasm. Winner's curse ( paying more for an item than its value) is widespread in this type of auction because inexperienced participants bid up the price.
One variation on the open-outcry auction is the open-exit auction in which the prices rise continuously, but players must publicly announce that they are dropping out when the price is too high. Once a bidder has dropped out, he may not reenter. This variation provides more information about the valuations (common or public) of others than when players can drop out secretly (and sometimes even reenter later).
In another variation, an auctioneer calls out each asking price and bidders lift a paddle to indicate a willingness to pay that amount. Then the auctioneer calls out another price etc.
In the ascending-bid format, the auctioneer can exert great influence. He can manipulate bidders with his voice, his tone, and his personality. He can increase the pace or even refuse to notice certain bidders (for example, if he believes someone is a member of a ring, the auctioneer might choose to ignore him).
Eric Rasmusen [Rasmusen] mentions one unusual variation on the English auction that occurs in France. After the last bid of an open-cry art auction, a representative of the Louvre has the right to raise his hand and say, "préemption de l' état" and take the painting at the highest price. It might be noted that in France, the auction privilege (the right to conduct an auction ) is sold to a select few individuals (some 500 throughout the country) by the central government. This privilege is called the chargé.
The key to any successful auction (from a seller's point of view) is the effect of competition on the potential buyers. In an English auction, the underbidder usually forces the bid up by one small step at a time. Often a successful bidder acquires an object for considerably less than his maximum valuation simply because he need only increase each bid by a small increment. In other words, the seller does not necessarily receive maximum value, and other auction types may be superior to the English auction for this reason (at least from the seller's perspective). [Varian]
Another disadvantage to the English system is that a buyer must be present which may be difficult and/or expensive. Finally, this auction type is highly susceptible to rings.
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