An Irish woman's social, political and domestic commentary
Tuesday, June 03, 2003  

Dutch Auction

Some trivia on this term.

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. (source)

and from Amazon...

Dutch Auctions

In Dutch auctions, the seller lists a quantity of items for sale--five Barbie dolls, for example, or 20 rocks that bear a striking resemblance to George Washington.

Bidders submit both how many items they wish to buy and how much they want to bid for each one. The final per-item price in a Dutch auction is determined by the lowest of the winning bids. The bidder who submits the highest of the winning bids is entitled to the quantity he or she specified, but at the lower per-item price. Remaining quantities of the item are used to fill other winning bids in the order of their bid price. Confused? This example should clear things up:

Joe and Sue are the individual high bidders in a Dutch auction for lamps. Joe placed a bid for 30 lamps at $20 each. In a subsequent bid, Sue offered to buy 10 lamps at $65 each. Because Sue's high bid ($65) is greater than Joe's high bid ($20), Sue is entitled to all 10 lamps she requested at the $20 price (the lowest winning bid). Joe is entitled to the remaining 20 lamps at $20 each, even though his original bid was for a quantity of 30.

There is usually more than one winner in a Dutch auction. Winners who are not the top bidder may win fewer items than requested in their original bids, but winning bidders are still bound to purchase the smaller number of items.

posted by Sarah | 11:26 0 comments
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