Copyright © 1996, Agorics, Inc.

Auction Types--Dutch

-by Kate Reynolds

One in a Series of Articles from Agorics, Inc.

The descending-price auction, commonly known in academic literature as the Dutch auction, uses an open format rather than a sealed-bid method. It is the technique used in Netherlands to auction produce and flowers (hence, a "Dutch" auction). Unfortunately, the financial world has chosen to refer to another type of auction as the Dutch auction. In the financial world, the auction known as "Dutch" is what is referred to in the academic world as a uniform, second-price auction. Great confusion results. In this series of articles, the "Dutch" auction will mean a descending-bid structure.

In a Dutch auction, bidding starts at an extremely high price and is progressively lowered until a buyer claims an item by calling "mine", or by pressing a button that stops an automatic clock. When multiple units are auctioned, normally more takers press the button as price declines. In other words, the first winner takes his prize and pays his price and later winners pay less. When the goods are exhausted, the bidding is over.

Dutch auctions have been used to finance credit in Rumania and for foreign exchange in Bolivia, Jamaica, Zambia and have also been used to sell fish in England and in Israel.

Dutch auctions are common in less obvious forms. Filene's, a large store in Boston, keeps in its basement a variety of marked-down goods, each with a price and date attached. The price paid at the register is the price on the tag minus a discount that depends upon how long ago the item was tagged. As time passes and the item remains unsold, the discount rises from 10 to as high as 70 percent.

It is believed that the English system may be inferior to Dutch in one area. The key to any successful auction (from the seller's point of view) is the effect of competition on the potential buyers, and in an English auction, the underbidder usually forces the bid up by one small step. The winner may end up paying well under his valuation and thus the seller does not receive the maximum price.

However, in the Dutch system, if the bidder with the highest interest really wants an item, he cannot afford to wait too long to enter his bid. That means he might bid at or near his highest valuation.

Characteristics of Different Types of Auctions
English, or ascending-price. Open. Seller announces reserve price or some low opening bid. Bidding increases progressively until demand falls. Winning bidder pays highest valuation. Bidder may re-assess evaluation during auction.
Dutch, or descending-price. Open. Seller announces very high opening bid. Bid is lowered progressively until demand rises to match supply.

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