Primary/Standard Types of Auction
In order to provide allocation for a single item, auctions are divided in following four traditional types:
First-price sealed-bid auctions:
These auctions are also known as blind auctions or sealed first-price auctions. The bids are kept secret until the result is declared. In this way, no bidder knows what amount the other person is going to bid. Bids are often delivered to auctioneer in a sealed or closed envelop. The bidder that offers highest bid has to pay the price he offered and receives the deal for the very same item. A major difference between blind auctions and English auctions is that bidders are not allowed to submit more than one bid. This rule prevents bidders from lowering the price than the price the item deserves. Each bidder tries to predict accurate price for the item, which is in much favor of the seller and the auctioneer too. Blind auctions also prevent bidders from incrementing or decrementing their bid according to other bids since they cannot see any and have only one chance to bid. Many theorists and researchers argue that this concept is very much similar to concept of Dutch auctions in a strategic perspective. However, many studies and observations have successfully proven that due to their high clock speed, Dutch auctions are said to yield lower prices compared to Blind auctions. Blind auction are preferred for government contracts and mining leases.
Second-price sealed-bid auctions:
These auctions are also known as Vickrey auctions. This type of auction is very similar to blind auctions or first-price sealed bid auctions. The only difference is that the winner pays the amount that is offered in second highest bid. Here, it should be noticed that bidder with highest bid is declared winner not the not the one with second highest bid. The winner pays the price of second highest bid rather than the price of his own bid. These auctions hold a special importance in auction theory.
The concept of Vickrey auction is usually used with automated contexts; real-time bidding for online advertising could be a great example of automated context. Second-price sealed-bid auctions are not much likely to be used in non-automated fields, use of them in such fields tend to be very rare.
Open ascending bid auctions:
Open ascending bid auctions mostly known as English auctions.
Presently, English auction is said to be most general format of auction. However, some arguments were made in offence of this statement, on which discussion is still going on. In this type of auction, bidders bid against each other openly. They require keeping their bid higher than previous bid. Bids can be submitted using various mediums such as:
Auctioneer announces the price
Bidders may make their offer themselves or keep a proxy to call bid on behalf of them
Bids can also be submitted electronically, the highest bid is always present publically.
An English auction ends only when no bidder is able or wants to bid further with higher amount. At such points, the highest bidder pays the price he offered and grabs the deal. There is an alternative option present for seller. Seller can set a reserved price for his item; bidders are not aware or told of that price. If final bid does not match or outlast the reserved price, the deal is canceled and item remains unsold. Auctioneer too can set a minimum difference. The subsequent bid must maintain this difference or more than that. An eye-catching factor of this type of auction is that the current highest bid is always available for genuine potential bidders.
Would you like to read more about this topic? This book might interest you: Auction Theory.