AUCTION

COMES FROM THE LATIN WORD AUGERE(PLURAL AUGTUS) MEANING TO INCREASE. IN GENERAL
PARLANCE WE UNDERSTAND AUCTION AS TO BE A SYSTEM OF SELLING OBJECTS THROUGH INCREASED
BIDDING WHERE THE HIGHEST BIDDER GETS TO BUY THE OBJECT.

YET AUCTION IS MUCH MORE THAN SIMPLY INCREASING THE BIDS. AN AUCTION SYSTEM DEALS WITH
SELLING AND BUYING OF OBJECTS THAT CONSIDERS MECHANISM SUBSTANTIALLY DIFFERENT FROM
THE REGULAR NORM.

HISTORY --- RIGHT TO MARRY, TAX COLLECTION RIGHTS, SLAVE TRADES WERE UNDERTAKEN THROUGH
AUCTION SYSTEM.

EVEN IIN TODAY'S WORLD AUCTION CONTINUES TO BE RELEVANT AND IMPORTANT. THE 3G
seenSPECTRUM SOLD IN SEVERALSEVERAL COUNTRIES, INCLUDING INDIA, THROUGH AUCTIONS. OTHER
RENOWNED ACTION ACTIVITIES ARE TAKEN UP BY SOTHEBY, CHRISTIE, BAAZEE. COM ETC. MINERAL
EXPLORATION RIGHTS, OIL DRILLING RIGHTS ARE SOLD USING AUCTION.

GENERALLY PRODUCTS ARE PURCHASED IN A SIMPLE TRANSACTION MODEL. THE BUYERS ASK FOR THE
PRICE, IF SATISFIED WITH IT PAY AND GET HOLD OF IT. AUCTION IS NOT THIS SIMPLE. ALTHOUGH THE
BUYING AND SELLING TAKE PLACE THE PROCESS IS DIFFERENT AS WELL AS COMPLICATED IN CASE OF
AUCTION

UNDER AUCTION THE SELLER DOESN'T KNOW THE PRICE HE MAY GET FROM THE BUYERS FOR THE
PRODUCT HE IS WILLING TO SELL. HE DOESN'T HAVE ANY IDEA ABOUT THE VALUE PLACED ON THE
PRODUCT BY THE POTENTIAL BUYERS.

USUALLY AUCTION FUNCTIONS AS A PRICE DISCOVERY MECHANISM. IT IS DURING THE AUCTION THAT
POSSIBLE PRICES COME UP AND FINALLY THE PRODUCT GETS SOLD AT THE END OF THE AUCTION.

IN OTHER WORDS, AN AUCTION TRIES TO FIGURE OUT THE HIGHEST BIDDER WHO IS WILLING TO PAY
THE HIGHEST AMOUNT FOR THE PRODUCT. (AS IT IS A PRODUCT ALWAYS GOES TO THE ONE WHO PAYS
THE HIGHER PRICE IN A REGULAR TRANSACTION) . AS LONG AS THE AUCTION CONTINUES, NOBODY
KNOWS WHAT WILL BE THE PRICE OF THE PRODUCT ON SALE. IN THIS SENSE, IT IS A PRICE DISCOVERY
MECHANISM.

IN AN AUCTION IT IS IMPORTANT THAT THE SELLER DOESN'T KNOW THE HIGHEST PRICE OR THE
HIGHEST BIDDER. IN OTHER WORDS THE SELLER IS NOT TO KNOW THE VALUATION ATTACHED TO THE
PRODUCT BY THE POTENTIAL BUYERS. IN CASE HE GETS TO KNOW THEN WHAT WILL HE DO? HE WILL
PICK THE HIGHER OR EVEN THE HIGHEST BIDDER AND NEGOTIATE FURTHER. THIS WILL ROB THE
PROCESS OF IT'S INTEGRITY. THE PRICE TOO WOULD BE A MANIPULATED ONE AND NOT BE THE
OUTCOME OF NORMAL/NATURAL MECHANISM.
AUCTION IS VERY DIFFERENT FROM ANY NEGOTIATION/BARGAINING PROCESS. IT HAS IT'S OWN
SPECIFIC/PECULIAR MECHANISM IN PLACE. IT IS A TRUE PRICE DISCOVERY MECHANISM AND CAN BE
USED FOR SCHEDULING AS WELL.

IT IS THEREFORE IMPORTANT TO KNOW HOW DOES IT WORK. FOR THIS WE GO FOR THE TYPES OF
AUCTION WHICH ARE BASED ON THE WAY IT FUNCTIONS. THE TYPES OF AUCTION DEPENDS ON THE
DIFFERENT PROCESSES INVOLVED IN CONDUCTING AN AUCTION.

1.BASED ON BIDDING PROCESS

A) OPEN OUTCRY BID AUCTION

B) SEALED BID AUCTION

IN CASE OF OPEN BID AUCTION THE POTENTIAL BUYERS NEED TO BID FOR THE PRODUCT OPENLY.
EVERY POTENTIAL BUYER GETS TO KNOW THE BIDS OF EACH OTHER. TYPICALLY THERE WOULD BE ONE
SELLER AND MANY POTENTIAL BUYERS WHO ANNOUNCES THEIR BID.

HERE BIDS ARE SEQUENTIAL AS THE BIDDERS ANNOUNCE THEIR PRICES ONE AFTER ANOTHER. THIS
ENABLES THE POTENTIAL BUYERS TO MODIFY THIER PRICES AFTER EACH ROUND.

THERE WOULD BE TWO WAYS OF BIDDING UNDER OPEN BID AUCTION :

ENGLISH AUCTION: WHERE BIDS MUST BE INCREASING FROM A RESERVED PRICE LEVEL. THE BUYERS
CALL OUT SEQUENTIALLY HIGHER PRICES. AUCTION CLOSES WHEN ONLY ONE BIDDER REMAIN IN THE
LOOP AT A SPECIFIC PRICE AND GETS TO OWN THE PRODUCT. THAT IS THE PERSON/BIDDER BIDS THE
MOST GETS TO WIN THE ITEM. IT IS THE CASE OF INCREASING PRICE AUCTION.IT IS TYPICALLY
OBSERVED IN ENGLISH AUCTION HOUSES.

DUTCH AUCTION :ALSO KNOWN AS DESCENDING PRICE AUCTION WHERE BIDS MUST DECREASE FROM
AN EXCESSIVELY HIGH PRICE. BIDDING CONTINUES TILL ONE PERSON REMAINS ON A SPECIFIC BID. SUCH
BIDDING TAKES PLACE IN DUTCH AUCTIONS FOR FLOWERS. DECREASING PRICES CANNOT FALL BELOW A
LEVEL FIXED PRIOR TO THE PROCESS.

IN CASE OF SEALED BID AUCTION , ON THE OTHER HAND, BIDS ARE MADE SECRETLY FROM ONE
ANOTHER. POTENTIAL BUYERS DECIDE THEIR RESPECTIVE PRICES AND PRODUCE IT IN A SEALED FORM.
AS LONG AS IT IS SEALED NONE GETS TO KNOW THE OTHER'S PRICES.HERE TOO THERE ARE MANY
POTENTIAL BUYERS AND ONE SINGLE SELLER.

HERE THE BIDS ARE SIMULTANEOUS. ALL THE POTENTIAL BUYERS SUBMIT THEIR PRICES AT THE SAME.
AS A RESULT THERE IS NO SCOPE FOR MODIFICATIONS OR CHANGES IT THE PRICES OF THE
BIDDERS/BUYERS.

UNDER SEALED BID AUCTION TOO THERE WOULD BE TWO WAYS OF BIDDING :
FIRST PRICE AUCTION WHERE THE WINNER HAS TO PAY THE PRICE QUOTED/BIDDED BY HIM. THE
HIGHEST BIDDER WINS AND PAYS THE PRICE BIDDED BY THE BIDDER.

SECOND PRICE AUCTION WHERE THE WINNER GETS TO PAY THE HIGHEST BID FROM AMONG THE REST
OF THE BIDS. IN OTHER WORDS THE HIGHEST BIDDER WHO WINS HAS TO PAY THE SECOND HIGHEST
PRICE AND NOT THE HIGHEST PRICE WHICH HE BIDDED.

2.BASED ON THE BIDDING PARTY WE GET

A) ONE-SIDED BIDDING AUCTION : HERE EITHER ONLY THE SELLER OR THE BUYERS. GENERALLY WHEN
ONLY THE POTENTIAL BUYERS ALONE BID. OPEN BID AUCTIONS ARE GENERALLY ONE-SIDED BIDDING
AUCTION.

B) TWO-SIDED BIDDING AUCTION : HERE BOTH THE PARTIES- SELLER AS WELL AS THE BUYERS GET TO
BID. THIS IS ONLY IN RARE SITUATIONS.

BASED ON BIDDERS VALUATION OF THE PRODUCT WE HAVE:

A) PRIVATE VALUE AUCTION

B) COMMON VALUE AUCTION

THIS SIGNIFIES THE REASON WHY PEOPLE PARTICIPATE IN AUCTIONS. WHEN BUYERS WANT A PRODUCT
FOR PERSONAL PLEASURE THEN THE VALUATION WILL BE PRIVATE. EACH BIDDER WILL HAVE HIS OWN
PLEASURE LEVEL, OWN NOTION ABOUT THE PRODUCT PERSONAL INTENSITY OF DESIRE FOR THE
PRODUCT AND SO ON. BASED ON THEIR PERSONAL PERCEPTION ON THE PRODUCT EACH BIDDER WILL
VALUE THE PRODUCT AND ASSIGN A PRICE FOR IT. IN THIS WAY WE GET PRIVATE VALUE AUCTION.

ON THE OTHER HAND, WHEN BUYERS WANT A PRODUCT FOR FUTURE GAINS FROM RESELLING THEN
WE GET COMMON VALUE AUCTION. THIS DIGNIFIED ECONOMIC REASON OF PARTICIPATING IN AN
AUCTION.

IN CASE OF PRIVATE VALUE AUCTION A BIDDER'S PRICE IS INDEPENDENT OF THE VALUATION OF THE
RIVALS. HOWEVER, COMMON VALUE AUCTION CANNOT BE INDEPENDENT OF THE ASSESSMENT OF THE
RIVALS. IF BIDDING GOES HIGHER THEN IT INDICATES THAT PEOPLE ATTACH HIGHER VALUE FOR THE
PRODUCT AND HENCE FUTURE GAINS ARE LARGER.