An Auction: Method Of Allocating Scarce Goods

You’ve read about them, you’ve heard about them, you’ve probably participated in one. But what correctly are auctions? Isn’t it just the simple method of selling an object to interested people who bid until the highest bidder gets it?

That is definitely the scenario in most auctions. But auctions are actually more complex than people realize. Do you know that not all auctions have climbing price schemes? While the ascending bid is the most popular auction format, other formats exist such as the descending, instantaneous and handshake forms of bidding.

An auction, in general terms, is the method of allocating scarce goods. It is a unique selling method that is based on competition. Truly, the objectives are simple: the seller wants to obtain the most money for his item while the buyers want to purchase it at their own beloved prices. Everything can be sold in auctions – from singular items like paintings to multiple units of a homogenous item such as treasury securities. Auctions are most useful when a seller is unsure of the price his item can get, or when selling a commodity with undeterminable quality.

Some unique things about auctions: the price of an item is set by the bidders and not by the seller. Also, the auctioneer doesn’t own the goods but rather acts as an agent for the real owner. Lastly, buyers often know the value of an item more than the seller.

Various classifications of auctions exist. There are open auctions and sealed-bid auctions. There are auctions wherein the price simple ascends and there are auctions where the price drops at regular intervals. Experts agree, however, that there are four major one-sided auction formats: English, Dutch, First-Price sealed-bid, and Vickrey (uniform second-price).

You may ask which type of auction is the best. It actually depends on the perspective of both the seller and the buyer. Some auction types lessen room for cheating while others seem to actually encourage such. Some auctions require the presence of the buyer while some do not. Before an auction is set, the seller must first scrutinize the auction format that would best benefit him. An aspect of auctioning that is sometimes very vital is speed. If the item you are selling perishes quickly, like flowers or fish, of course a quick auction is required.

While it has its’ advantages, an auction also has drawbacks, like the so-called “winner’s curse”. This is the phenomenon when a “lucky” winner pays more for an item than it is worth. These winners realize that their evaluation of an object is higher than that of anyone else.

In this age of modern technology, auctions have found a place where it can thrive and reach more prospective buyers: the Internet. Online auctions are becoming more popular each day as buyers can browse through the products and bid at their own time and pace. Furthermore, the range of products people auction online is endless and interesting - you could spend hours just browsing.

All in all, auctions are a pure marketplace at work in its finest form. So if you’re planning to sell something, you might consider auctioning it. Just look at it from this perception: your clutter is other people’s treasure. And they’re going to compete to get it.