Copyright © 1996, Agorics, Inc.

Auction Offshoots

-by Kate Reynolds

One in a Series of Articles from Agorics, Inc.

(Much of this section was written using information in Ralph Cassady's book, Auctions and Auctioneering.) [Cassady]

The Simultaneous Bidding System

In the simultaneous format (also known as the Japanese system) all bids are offered by prospective buyers at (almost) the same time using individual hand signals for each monetary unit. In theory, all bidding occurs at exactly the same moment, but in practice it takes several minutes for buyers to get their hands in the air and also for the auctioneer to read the signals. The winner is the highest bidder, and all bidders are expected to register their maximum bids within the allotted moments. In practice, some bidders manage to see the bids of others and raise their own within the time allowed.

Each of the hand signs represents a number from one to nine. Two- or three-digit numbers are indicated by rapidly repeated hand signals. The use of two-digit numbers is not always necessary if the auctioneer and bidders know a particular bidding level, and in a case such as this, the bids may be partly inferential. For example, a man signaling three may actually be bidding three hundred (in much the same way that one American real estate agent might tell another that a certain house is selling for seven when she means seven hundred thousand dollars).

This form of bidding is extremely fast which is important in the fresh food markets of Japan when time lost means fish that cannot be sold. It is characterized by great noise and confusion as many bidders try to gain the attention of one auctioneer.

Haphazard Systems

Ralph Cassady [Cassady] refers to several auction types collectively as "haphazard" formats meaning that in each system every bidder communicates privately to the auctioneer who then considers the bid and later announces the winner. It is haphazard in that the bidding is not required to either ascend or descend, but instead is carried out in some random order.

The Written-bid Auction

This format, sometimes called the "dumb" scheme, requires all bids to arrive in written form. In that respect it is very much like the sealed-bid system used to award housing contracts, but there are a couple of differences. In a sealed-bid scheme awarding a housing contract, the bidders are actually sellers more than they are buyers. In addition, housing contracts are granted after a period of weeks or even months, whereas in the written-bid system, participants have but a few moments to formulate and tender their bids. It has been used in Japan to sell dried fish.

It works this way: Bidders (after examining the various lots for sale) deposit their bids in a box which is then handed to an auctioneer. After some agreed-upon time interval has expired, the auctioneer announces the winner (if the reserve price has been met). This is a relatively slow method especially when the lots are put up separately. Consider that if each bidding period averages three minutes, then only twenty lots can be sold in an hour. Time may not be important in a market of imperishables (dried fish), but busy sellers and buyers object to spending long hours in a process that can be accomplished faster.

One way of speeding up this type of auction is to offer several lots simultaneously, but this can prove cumbersome. Often a buyer only wants to bid on a certain lot only if he has been unsuccessful in winning others. For example, if a participant has $500 to spend, he cannot bid intelligently on Lot B until he learns if he has won Lot A, and if so, how much he has paid for it. If too many lots are offered simultaneously, the participant cannot know which lots he has won until the entire auction is complete. Another disadvantage is that a bidder has little flexibility. If he wants something, he must bid high. He could possibly attain the goods for less under the English system by raising his bid one step higher than the competitor.


The Handshake Auction

The handshake format is one of oldest auction schemes in existence. Buyers communicate their bids to an auctioneer by squeezing his fingers in a certain prescribed manner. This method originated in China and was used until the late 1950's.

It works as follows: A group of bidders stand in a circle around the auctioneer and each, in turn, clasps the hand of the auctioneer. The hands are hidden under a cloth and so only the bidder and the auctioneer know the amount of the bid. The potential buyer indicates a bid by pressing some number of the auctioneer's fingers and simultaneously announcing aloud the monetary unit, first "tens", then "rupees", then "anas". Multiple squeezes offer flexibility to the bidder--a bid of twenty can be offered either by squeezing two fingers simultaneously or by squeezing one finger twice while announcing the unit as ten.

The auctioneer is expected to remember each bid, and he announces the winner after all have taken a turn (one turn per bidder). The actual amount of the sale is kept secret, and of course this offers the auctioneer an opportunity for collusion.

Adroit bidders frequently want to mislead the competitors and have learned deceptive techniques. If, for example, a bidder wants to convince others that his bid is lower than it really is, he can grasp all fingers including the thumb, announce the smallest unit (tens), and squeeze repeatedly and quickly.

If he wants to convince others he is making a high bid, he can grasp only one finger and announce a larger unit.

Sometimes a bidder doesn't wish to bid on a certain lot but still wants to hide this from others. In such a case, he can take the auctioneer's hand, make some bid and then cancel it by scratching the auctioneer's palm while he announces the monetary unit.

The handshake method is very time-consuming.

The Whisper Auction

In this system, the auctioneer announces that an item is for sale, and buyers whisper their bids in his ear. As in other haphazard auctions, the bids have no pattern and participants offer bids without knowledge of the bids of others. This method is used in some fish markets (Venice, Singapore). Like the handshake method, the whisper auction is very time-consuming.

The whisper auction and the handshake format do offer a singular advantage to the seller and that is that a seller can ignore certain bids or bidders. For example, a seller will not want to consider the offers of people known to be bad credit risks and in this method, the seller does not announce the winning bid. The bidder, of course, has no motivation to reveal pricing information. Another advantage to sellers is that the whisper method keeps them well informed of the demand for fish. Management can price fish intelligently with this information, however, the opportunity for auctioneer collusion certainly exists.


The Time-Interval Auction

Basically, the format of a time-interval auction is similar to an English (ascending bid) form, however all bidding must be completed within a certain time allotment. An advantage to bidders is the ability to revise a bid upward. Also, the bids are public which means that a bidder need raise his bid only slightly to beat the competition. The time-interval method is used in the real-estate market and, more recently, in the manuscript market where publishers bid on high profit manuscripts within certain time limits. In the real-estate and manuscript markets an auction can consume days or weeks. Other time-interval auctions can be completed in the time it takes for sand to pour through an hourglass.
One of the very oldest time-interval auctions is that in which a burning candle is used to measure total bidding time, and this method has been used to sell property as recently as the early twentieth century.

It works as follows: A circle of people gather together out of the wind. One of them cuts a candle to a length of about one inch and then lights it. Participants call out their bids in ascending order as they keep one eye on the flame. The winner is the person who made the highest bid before the candle flickered out. An offshoot used sometimes in Cornish auctions, requires the auctioneer to insert a pin one inch below the top of the candle. As long as the pin stays in place, the bidding can continue. When the pin drops, the auction is over and the goods are sold.

Interesting bidding strategies are used in a candle lit auction. Sometimes a participant will make a high bid early on to scare off the competition. Another technique is to wait until the final moments before offering a comparatively high bid. This usually forces opponents to rethink the matter, but before they have time to do so, the auction is over. Mostly, however, participants bid actively throughout. Sometimes all bidders adopt the strategy of waiting until the final moments and then a glut of bids come at the end making it hard to determine a winner.

The Silent Auction

The silent auction is a variation of the written-bid auction, (and also the English auction) but in this format the participants bid knowing how much competitors have offered, and so prices move steadily upward. Would-be buyers enter their names on a sheet of paper next to the amount they are willing to bid. (The sheet of paper contains the minimum acceptable bid if applicable.) Bidders can thus check to see the current high bid while they consider their options. This auction can take place over a period of hours or days.

Bidding strategies include waiting for the last minute to bid (thus lulling the competition into false security) or bidding high immediately to discourage competition.

My husband and I participated in one silent auction in which there was an unusual (and unfortunate) result. We had been bidding with great spirit for a jar of chocolate truffles, and as time wore on, our competition was reduced to one other bidder. Moments before the final bell rang, my husband entered what he assumed to be the winning bid, and we sat down to dinner to watch the rest of the program (which included the announcement of winners). Unfortunately, our competitor (who was assisting the auctioneer) sneaked over after the final bell, crossed off our bid and wrote in a new one. At this writing my husband is still angry.

The Audible-Bid Rotation Auction

In the handshake auction, each bidder takes his turn and all the bids are kept secret. In the audible-bid rotation method, bidders also alternate in a rotation pattern, but the bidding is open. As in the English auction, the bids are ascending (not haphazard). The auctioneer writes the current high bid on a blackboard and erases it as larger bids are made. Each bidder, in turn, either raises his bid or passes. The merchandise is awarded to the highest bidder at the highest price.

The Swiss Auction

The Swiss construction industry awards contracts on a first-price, sealed-bid basis. [Von Ungern-Sternberg] What is unusual about the Swiss auction is that if the designated winner does not wish to accept the project, the architects will usually (but not always) allow him to withdraw the bid. The bid itself may not be modified, but the winner can choose whether to accept or refuse the project. There are very practical reasons for this auction.

Architects argue in favor of this method because timetables and specifications nearly always require modification and there is no point in working with a contractor who doesn't want a certain job.

A Swiss auction also takes into account certain constraints on the part of the construction company. Construction companies often have to bid on more than one project at a time which affects timing, cost overruns, labor availability. Frequently the specifications change on a current job and thus they cannot predict their own future availability. It is reasonable to let them withdraw if they cannot meet the contract specifications. Only when there is a significant difference (say, ten percent) between the winning bid and the second-highest bid, is the winner forced to accept the job.

The ability to withdraw is not written formally into the rules because of the open invitation to cheat. A high bidder could approach the second-highest bidder, offer to withdraw, and obtain a nice side payment. A certain amount of discretion is given to the auctioneer to avoid this; the auctioneer can force a company to meet its bid.

The overall effect is that often contractors bid more aggressively because they have this option that allows for flexibility.

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Work presented here is copyrighted material belonging to Agorics, Inc. (Copyright © 1996, Agorics, Inc.) Agorics, Inc. reserves all copyrights. Agorics disclaims any warranty as to the utility, accuracy or effectiveness of the information contained in this document and specifically disclaims any liability for consequential damages that may result directly or indirectly from use of the information in this document.