An auction refers to the business of buying and selling goods or services by offering them for sale by way of an initial bid price, then taking bids pursuant of that initial price, and then selling to the highest bidder.
In terms of economics, an auction relates to the exchange of goods and services and may be conducted by no one particular methodology or set of trading rules.
There are a number of different types of auction format, such as time limits, minimum and maximum limits on bid prices, and special rules for determining the winning bidder and sale price.
Those involved in an auction may or may not be aware of the identities or intended actions of other participants in the auction. Although not all auctions are conducted in the same way, in general, bidders may participate either in person or acting on behalf of another in a number of ways, such as by telephone or the internet.
It is normal practice for the seller to pay the auctioneer a commission which is based on an agreed percentage of the final sale price achieved.
No two auctions are the same and each has its particular characteristics, such as pricing accuracy, or the time required in the preparing and execution of the auction.
The number of bidders who are acting simultaneously is particularly important. Open bidding over a period of time involving numerous bidders is most likely to result in a final bid that is very close to the true market value.
Where there are few bidders and each bidder is only allowed one bid, although time is saved in this way, the winning bid may not be a true reflection of the market value. The time between the opening bid and final bids is of particular significance.
Auctions can differ in terms of the number of participants that are bidding.
This is characterised by the following situations:
Consider a Supply auction. There may, let us say, be A sellers who are offering goods that one or more buyers are willing to bid for.
In a Demand auction, there may be, for example, B buyers who bid for goods that are being sold.
In a Double auction, there may be B buyers who are bidding to buy goods from A sellers.
Prices are bid, or offered, by buyers and asked for by sellers. Auctions may also differ in the way in which bidding or asking is transacted.
Hence, in an open auction, the participants may repeatedly bid and are aware of each other's previous bids. In a closed auction, buyers and sellers submit sealed bids.
Auctions may differ according to the price at which the item is sold. This may consist of the initial or best price, the second price, the first unique price, or some other variant. Auctions may set a reservation price which is normally set at the minimum acceptable price for which the product or service may be sold or bought. However, on occasions, it may refer to the maximum, and not the minimum price, at which the transaction may occur.
In the final analysis, an auction generally refers to an open, demand auction, with or without a reservation price, which is sometimes called the reserve, with the item sold to the highest bidder.
Auctions – How To Succeed
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