English auction
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In an English auction (also called an Open-outcry auction), the auctioneer begins the auction with the reserve price (lowest acceptable price) and then takes larger and larger bids from the customers until no one will increase the bid. The item is then sold to the highest bidder.
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[edit] Variations
There are many variations on this auction system. Sometimes, the reserve price is not revealed. The auctioneer might do this to prevent rings, groups of bidders who promise not to outbid each other, lowering the final price. Also, bids may be made with signals instead of being called out. Such signals can include tugging an ear or raising a bidding paddle. This system reduces the noise from the auction. Another variation on the English auction is the open-exit auction, where the bidders must announce that they are dropping out of the bidding and they can't reenter. This tells more about how valuable people consider the item up for bid than a regular English auction. In France, when the last bid has been made in an auction for an art object, a member of the Louvre can say "Préemption de l'état" (Pre-emption of the state) and buy the object for the highest bid. Some housing cooperatives similarly allow members of the cooperative to pre-empt any buyer of a house constructed by the cooperative[1].
[edit] Advantages and Disadvantages
An English auction has several advantages and disadvantages for both the buyers and the seller. Winner's curse is rampant in these auctions due to strong competition and inexperienced participants getting carried away in the heat of the moment. This is good for the seller. But, the object on sale can be bought for much less than its value if bidding is slow, and rings can take advantage of the nature of English auctions. A disadvantage for both buyers and sellers with the English auction is that everyone must be in communication over the course of the auction, which can be expensive and difficult.
In economic terms, the Price the winning-bidder pays is greater than the Marginal Utility (the value of one additional unit of something) of the second highest bidder. Or Price > MU-second highest bidder. For this reason it is extremely likely to overbid.
[edit] See also
[edit] Notes and References
- Note 1: OBOS, a housing cooperative in Oslo that practices preemption.
