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An auction is the process of buying and selling goods by offering them up for bid, taking bids, and then selling the item to the winning bidder. In economic theory, an auction is a method for determining the value of a commodity that has an undetermined or variable price.
Auctioning can be traced as far back as 500 B.C.[1] Auctions can be with reserve or minimum, or without minimums, or absolute or no reserve. In reserve auctions, there is a minimum bid or reserve price; if the bidding does not reach the minimum, there is no sale (but the person who puts the item up for auction may still owe a fee to the auctioneer or auction company). In absolute or no reserve auctions, the sale is guaranteed, with only the price left to be determined. In the context of auctions, a bid is an offered price.
History of the Auction
According to ancient Greek scribes, the more generally accepted auction occurred first in Babylon in 500 B.C. During this period, auctions were held annually, and women were sold on the condition of marriage. It was considered illegal to allow a daughter to be sold outside the auction method. Women with “beauty” engendered higher bidding, women without “beauty” had to pay a dowry to be accepted into the auction, and thus the price would be negative.
During the Roman Empire, following military victory, Roman soldiers would often spear the ground to mark the location of spoils in which goods and property were seized. Roman business agents were said to have accompanied warriors into battle to help facilitate expected sales. The Romans also used the auction to liquidate their own property. For example, Marcus Aurelius is said to have auctioned off prized heirlooms and furniture, (an auction that, as legend has it, lasted over two months). The most legendary auction occurred in the year 193 A.D. when the entire Roman Empire was put on the auction block by the Praetorian Guard. On March 23rd, The Praetorian Guard first killed Pertinax the emperor, and then announced that the highest bidder could claim the entire Empire. Didius Julianus outbid everyone for the price of 6,250 drachmas per Guard, an act that initiated a brief civil war. Didius was then beheaded two months later when Septimus Severus conquered Rome.
During the end of the 18th century, soon after the French Revolution, auctions came to be held in taverns and coffeehouses to sell art. Such auctions were held daily, and catalogs were printed to announce available items. Such Auction catalogs are frequently printed and distributed before auctions of rare or collectible items. Many of these catalogs may be very elaborate works themselves, with considerable details about the items being auctioned.
During the American civil war, goods seized by armies were sold at auction by the Colonel of the division. Thus, some of today's auctioneers in the U.S. carry the unofficial title of "colonel". Auctioneers are usually trained in the legal and practical aspects of conducting auctions. Some jurisdictions require auctioneers to be licensed and bonded.
Major auction houses include Christie's, Sotheby's, Lyon & Turnbull, and Bonhams. The Dorotheum, the world's oldest auction house, was established in 1707 in Austria.
Internet auctions, such as eBay and GoIndustry, have become very popular with the prevalence of Internet. Other websites, such as AuctionZip and Auctioneers, display live auction listings from auctioneers nationwide.
Types of auctions
- English auction: This is the type of auction commonly used by the English auction houses like Sotheby's, Christie's, and Phillips. Participants bid openly against one another, with each bid being higher than the previous bid. The auction ends when no participant is willing to bid further, or when a pre-determined "buy-out" price is reached, at which point the highest bidder pays the price. The seller may set a 'reserve' price and if the auction fails to have a bid equal to or higher than the reserve, the item remains unsold. A variant popular in the time of Samuel Pepys was 'auction by candle' in which the winning (highest) bid was the last one to be made before a small piece of lit candle died out.[2] Such auctions can be vulnerable to collusion, when two or more bidders act together to win the auction. Following the auction result, the "loser" threatens to sue the winner, who then proposes a settlement. The settlement is actually the pre-agreed reward for the loser's cooperation. This strategy was described by the economist Susan Athey.
Within this type of auction, there is several manners in which bidding can occur. First, is the absolute auction, which means that the item will be sold for the highest possible price, with no reserve. Second, is a reserve auction, which establishes a minimum bid or price for the item that will be accepted by the person who is selling the item. Third, you have Absentee bidding, which means that a bid is left with the auctioneer. Fourth, is internet bidding, where the bidding can be online and at the auction house at the same time. Fifth is Phone bids, which is nearly identical as absentee bidding, but an auction house employee does the bidding for the buyer. And last but not least is the sealed bidding process.
- Chinese auction: Basically, a raffle.
- Dutch auction: In the traditional Dutch auction the auctioneer begins with a high asking price, which is lowered until some participant is willing to accept the auctioneer's price, or a predetermined minimum price is reached. That winning participant pays the last announced price. The Dutch auction is named for its best known example, the Dutch tulip auctions. ("Dutch auction" is also sometimes used to describe online auctions where several identical goods are sold simultaneously to an equal number of high bidders. Economists call the latter auction a multi-unit English ascending auction.)
- Sealed-bid first-price auction: Also known as Sealed High-Bid Auction or First-Price Sealed-Bid Auction (FPSB). In this type of auction all bidders simultaneously submit bids so that no bidder knows the bid of any other participant. The highest bidder pays the price they submitted.
- Sealed-bid second-price auction, also known as a Vickrey auction: This is identical to the sealed first-price auction, except the winning bidder pays the second highest bid rather than their own. This is very similar to the proxy bidding system used by eBay, where the winner pays the lesser of their actual bid and the second-highest bid plus one bidding increment.
- All-pay auction: an auction in which all bidders must pay their bids regardless of whether they win the prize. The highest bidder wins the prize. The all-pay auction is often used to model lobbying (bids are political contributions), or other competitions.
All of the private value auctions listed above are revenue equivalent when under complete information scheme, meaning that they all result in the same expected revenue for a seller.
Terminology
- Silent auction: This is often a variant of an English auction, where bids are written on a sheet of paper, and at the predetermined end of the auction, the highest listed bidder wins the prize. This auction variant is often used in charity events, and many items may be auctioned simultaneously. Participants submit bids normally on paper, near the item. Other variations of this type of auction may include sealed bids. The highest bidder pays the price he or she submitted.
- Digital art auction: In this indefinitely long auction, designed for unreleased works that are trivially reproducible at zero cost (recordings, software, drug formulas), bidders openly submit their maximum bids (which may be adjusted or withdrawn at any time). The seller may review the bids and close with a price of their choosing at any time — the successful bidders that pay this price are those whose bid meets or exceeds it, and these are the only bidders who receive a copy of the item.
- Open outcry auction: This type of auction can refer to any auction where the auction is conducted orally for people to hear. This type of auction also refers to what is used in stock exchanges and commodity exchanges, where trading occurs on a trading floor and traders may enter verbal bids and offers simultaneously. Transactions may take place simultaneously at different places in the trading pit or ring. This type of auction is being replaced by electronic trading platforms.
- Unique bid auction: In this type of auction users post blind bids and are given a range of prices they can place a bid in, often a capped limit. The highest, or lowest, unique bid wins. For instance an auction is given a maximum bid of 10. If the top five bids are 10, 10, 9, 8, 8 then 9 would be the winner being the highest unique bid. This a popular online type of auction.
- Buy-out auction: This auction has a predetermined buy-out price in which the bidder can end the auction by accepting the buy-out price. The buy-out price is set by the seller. The bidder can choose to bid or use the buy-out option. If no bidder chooses to utilize the buy-out option, the auction ends with the highest bidder winning the auction.
- Combinatorial auction: A combinatorial auction is an auction in which bidders can place bids on combinations of items, or “packages,” rather than just individual items.
- Absolute auction, also known as an Unreserved Auction, No-reserve Auction or Auction Without Reserve, is an auction with no minimum bid amount, no set starting bid, no seller confirmation of the high bid price, and no buybacks of the property being offered by the seller of any agents of the seller. The highest bidder will purchase the property no matter the high bid price. This type of auction is designed to attract the maximum participation from the buying public as the seller has committed to convey their property to the highest bidder without limitation. It does offer buyers excellent opportunities from time to time, however. A 2003 Virginia statute defines an absolute auction as "an auction where at the time of the auction sale the real or personal property to be sold will pass to the highest bidder regardless of the amount of the highest and last bid."
In terms of security/privacy, there are two main types of auctions:
- In a private auction the identities of the bidders are hidden, so anyone that buys the item can remain anonymous. This is normally done for either security reasons such as rare gems or art, or to avoid embarrassment if the item is more risque.
- In a public auction, the bidders' identities are not hidden and anyone is welcome to attend the auction.
In terms of auctioneers and auction items, we can differentiate three types of auctions:
- exchange auction — also known as commodity auctions or exchange-commodity auctions, are the most closed to the new participants. The participants include a number of core professional buyers, who monitor each other to ensure that no one is 'cheating' on the community
- sale auction — for art and one-of-a-kind items
- dealer auction — for collectibles, cars or machinery
If more than one identical item is sold, there are two possible generalizations of the second-price auction. In a uniform-price auction, all of the winning bidders pay the price submitted by the highest non-winning bidder. Bidders will not typically bid their true value in a uniform-price auction with multiple units. In a Vickrey (or second-price sealed-bid) auction, the pricing rule is more complicated, but preserves the property that bidders will bid their true valuation. It is also possible to auction each identical item individually. Once each item has been priced, the winning bidder is entitled to buy the remaining goods at the same price. Items the winning bidder opts not to purchase are auctioned again. This system creates a tension between the desire to hold back on bidding since later items will almost certainly be cheaper, and the chance that by losing the first round of bidding all possibility of purchasing will be lost.
Work in the theory of auctions contributed to Vickrey's 1996 Bank of Sweden Prize.
- Reverse auction: A type of auction in which the role of the buyer and seller are reversed, with the primary objective to drive purchase prices downward. In an ordinary auction (or also known as forward auction), buyers compete to obtain a good or service. In a reverse auction, sellers compete to obtain business.
Common uses for auctions
Auctions are publicly and privately seen in several contexts and almost anything can be sold at auction. Some typical auction arenas include the following:
- the antique business, where besides being an opportunity for trade they also serve as social occasions and entertainment
- in the sale of collectibles such as stamps, coins, classic cars, fine art, and luxury real estate
- the wine auction business, where serious collectors can gain access to rare bottles and mature vintages, not typically available through retail channels
- in the sale of all types of real property including residential and commercial real estate, farms, vacant lots and land
- for the sale of consumer second-hand goods of all kinds, particularly house clearances and online auctions.
- sale of industrial machinery, both surplus or through insolvency.
- in commodities auctions, like the fish wholesale auctions
- in thoroughbred horseracing, where yearling horses are commonly auctioned off; and
- in legal contexts where forced auctions occur, as when one's farm or house is sold at auction on the courthouse steps.
Although less publicly visible, the most economically important auctions are the commodities auctions in which the bidders are businesses even up to corporation level. Examples of this type of auction include:
- sales of businesses
- spectrum auctions, in which companies purchase licenses to use portions of the electromagnetic spectrum for communications (e.g., mobile phone networks)
- timber auctions, in which companies purchase licenses to log on government land
- electricity auctions, in which large-scale generators and consumers of electricity bid on generating contracts
- environmental auctions, in which companies bid for licenses to avoid being required to decrease their environmental impact
- debt auctions, in which governments sell debt instruments, such as bonds, to investors. The auction is usually sealed and the uniform price paid by the investors is typically the best non-winning bid. In most cases, investors can also place so called non-competitive bids, which indicates an interest to purchase the debt instrument at the resulting price, whatever it may be
- auto auctions, in which car dealers purchase used vehicles to retail to the public.
For some people, participating in an online auction seems intimidating -- too "high tech." But sites like Yahoo! Auctions and Ebay have made it easy for you to sell your discards from the comfort of your own living room. If you can use the INTERNET, you can sell your items online. Essentially, it's like placing a newspaper ad -- only on the internet. And instead of having to speak with dozens of people over the phone about your product (describing it and dickering over the price, again and again), it all takes place AUTOMATICALLY on the web with very little interaction from you.
The process is easy. You simply post a DESCRIPTION of your product, set a TIME-LIMIT for how long you would like people to bid on your item, and wait to see what happens. Of course, on occasion, you will receive a question or two from a potential bidder -- but these are easily handled with a quick email. Finally, when your bid expires, you receive payment from the buyer and SHIP out your product. When done correctly, it's as easy as pie! Of course, you can always run into snags -- but here are a few suggestions for creating a smooth transaction process.
WHAT'S IN A NAME?
The first thing that a potential bidder will see about your product is the TITLE. When searching for a specific item or scanning through a category (like "sports equipment" or "household goods"), your product will be listed on a main page as nothing more than a title and a hyperlink to your product description. Since your title is generally short and limited to one line, make it count! If an item is new, include the word "new" in the title -- and use the acronym NWT (new with tags) to indicate that an item has never been used. If it is a recognizable and respected BRAND-- like "Nike" or "Donna Karan" -- be sure to include that information. With clothing, indicate whether it is "mens," "womens," or "kids." And don't forget the size and color. While this isn't the appropriate place for a lengthy sales pitch, you want to catch a customer's attention on that first pass.
You will also want to make sure you choose an appropriate CATEGORY for your product. Try to place your items in a category where other similar items live -- you will benefit from the fact that shoppers will already be searching in that category for related products. If you are having a hard time deciding on a category, ask yourself, "Where would I LOOKfor this item if I were trying to buy one?
YOUR DESCRIPTION
Make sure that your description is as DETAILED as possible. In most instances, you won't have a space limit for describing your product -- and the general rule of thumb is the more information, the better. People don't want to have to contact you to see what size something is or if the attachments come with it or if it has any scuff marks. And you will save yourself time and effort by being THOROUGH up front -- you will receive fewer "clarification" emails from potential bidders. Remember, the goal in an online auction is not just to make money -- it's to make the process as automated as possible. The less you have to be involved after the auction starts, the better!
Another important factor in your success with online auctions is HONESTY. In today's climate, people are leery of incomplete descriptions because it feels as though the vendor may be trying to pull something over on them. Be honest upfront about the age of the item, its features, and any FLAWS or damage. Too many people throw the phrase "like new" around indiscriminately. You may be able to pawn a shabby product off on someone the first time -- but they will hurt you more in the long run by ruining your credibility and reputation as a vendor with negative feedback.
GET VISUAL
When you sell an item at a consignment store or yard sale, potential customers have the benefit of personal interaction with the object -- they can see it up close, touch it, and examine it thoroughly. However, on the internet, the only method that buyers have to evaluate a piece of merchandise is through your description and any PHOTOS you include. Be sure to take pictures from several different angles -- and include "close-ups" of any important features or small parts. If you are selling an item with "minor damage" in an area -- such as a scuff or a small stain -- take a close-up picture of the DAMAGE to show exactly how minor it is. And try to photograph your items on a neutral color background so the focus is on your product.
One of the biggest mistakes sellers make is leaving the photo out because it seems like too much work. Think about it -- if you are searching on Ebay for a food processor and find 25 of them but only 10 have pictures, which ones will you consider buying first? And many shoppers won't even bother looking at a product description unless it says "photo attached." So taking the few extra minutes to shoot a DIGITAL picture or SCANa standard photograph mean the difference between a sale and a waste of time.
PRICING OPTIONS
Many web auctions - Ebay in particular -- offer a couple of different options for pricing your product. You may choose to participate in the traditional AUCTION format -- where you set a starting price for your item, allow people to bid in discrete increments ($1, $5, $10, etc.), and ship the product to the highest bidder when the auction ends. However, if you have a product that is worth a considerable amount, you may want to include a RESERVE PRICE. This is a minimum amount that you are willing to accept for your merchandise -- and if the reserve is not met, you are not obligated to sell it. For example, you may have a starting bid price of $10 on a used set of Ping golf clubs, but choose to set a reserve price of $75. If the final bid is not at least $75, the bidder does not get the clubs.
Finally, you may want to offer bidders the option to simply BUY your product for a set price at the start of bidding. Let's use the golf club example again. In this instance, the bidder would have the option to go through the normal auction process and risk losing out to another buyer - or, could choose the "buy now" option and simply pay you a pre-set price (let's say $95) for the clubs. This makes life a lot easier for a bidder who knows what he or she wants and is willing to forgo a potential bargain to get it. And it allows you to get a fair price from a determined buyer.
PAYMENT
This is the one issue that intimidates potential sellers more than any other - how will you get paid for your sale? You can hear dozens of horror stories on the web about sellers who were cheated out of their payments by accepting rubber checks or fraudulent credit cards through services like PayPal. So what do you do?
According to consumer advocate Clark Howard, the safest way to either buy or sell an item on an online auction service is through an ESCROW account. This is a third party company that will receive a cash payment from your buyer, hold it until your product has been safely delivered, and then pay you. However, you need to be on the lookout for the latest internet scam -- phony escrow services. The best route to take is to use one of the escrow companies RECOMMENDED by the online auction service. These companies have earned a solid reputation and should be completely above-board. But if you have any doubts, be sure to check them out with the Better Business Bureau first.
Fraud
Some ways to avoid becoming a victim of auction fraud:
Ask the seller for a phone number and call it.
Use an escrow service, which holds your payment until you inspect the item.
Check the seller's feedback carefully.
Scrutinize the users who have provided feedback on the seller and what they say they purchased.
Be wary of sellers who ask you to wire money overseas, especially to Eastern Europe, and of those who request that payment be mailed to post office boxes.
Use a credit card. It can be safer to pay this way because of the extra protection many credit card companies offer. Some online payment services also provide such coverage.
Be wary of a combination of suspicious elements, like several short simultaneous auctions of expensive items by one seller who does not list reserve prices; opening prices that seem irregularly low; offers to pay shipping; and little or no feedback.
Some classic online auction scams of which you should be wary.
SNIPINGis the practice of entering a final bid just before time runs out, so other bidders can't counter in time.
BID SHIELDING is a tag-team scam, with two bidders conspiring.
One bidder bids just higher than the current highest bid; his partner then bids way too high, discouraging consequent bidding. Then at the last possible moment, the high bidder withdraws so that his partner wins, for a lower price.
SHILLINGis a seller's scam--the seller puts an item up for bids, then bids for it using a different identity, driving up the price.
Hot auction tips
When listing an auction you simply select the most appropriate and obvious category for your item. But savvy sellers know that there can be more finesse involved when deciding upon a particular category.
Obviously you don't want to confuse bidders by listing your items in inappropriate categories. Certainly there are right and wrong categories. But, by choosing an alternate and less obvious category for your item you can open up your auction to a whole new audience. For example, booksellers sometimes will avoid listing in the mammoth book categories and instead list according to the book's subject matter--books on computers might be listed in the computers or software section, and so on.
You can snag someone interested in the subject, who just didn't know they needed a book!'' Just take a little time to consider other categories and who your target audience is and which category pages they're likely to browse. A little creativity and innovation can lead to more hits, more bids, and more profits. Remember that some categories are so large that your item might get lost in the shuffle. Try listing in a smaller yet still appropriate category. Also, if you're selling more than one item or similar items, conduct a little market research by listing items in different categories. Then sit back and see which category is the most successful.
When sellers relist their auctions, they usually make a few changes (lowering the price, altering the description or title, etc.) to try to turn around an unsuccessful auction. Another common tactic is switching categories. There are times when sellers, especially new sellers, might not be sure about which categories to choose for their items. In those cases, it's best to do a search for the same item or similar items and find out where other sellers have listed their items. If your search results show listings in more than one category, determine which category is soliciting the most bids for that particular item.
Before travelling any considerable distance to a local or community auction, you should obtain a catalogue of items to ensure the goods for sale are what you require. Certain auctions can be subject to cancellation at short notice and it is therefore a good idea to phone on the morning of the sale to confirm the sale is going ahead.
You should inspect the items thoroughly as most auction items are sold without guarantees, if items are described as faulty check that the faults can be easily repaired, sometimes you can test the goods before the auction starts, ask the auctioneer if this is possible.
Some motor vehicle auctionsgive you a period of time after the sale in which to return the vehicle if it is found to be faulty, again check this with the auctioneer prior to bidding.
Think about setting yourself a price limit on the goods you are interested in and "stick to it", how much would the item cost new with a guarantee? Remember a "buyers premium" may be added to the final bid price at some auctions and local taxes may also be added to the price ( check the "conditions of sale" in the catalogue or consult the auctioneer before bidding ) Catalogues are not set in stone and items listed can change. Listen out for any changes stated by the auctioneer in the description they give of the item at the start of bidding.
If you bid for the wrong lot, tell the auctioneer immediately, although you have a legal obligation once you have won the bidding the auctioneer may present the item for auction again, but this is purely at the auctioneers discretion and you may have to make up any difference if the final price is lower than your original successful bid.
Follow these auction safety tips: Pay by credit card when you can.
If you never receive the merchandise, you can contest the charges with your credit card issuer. Check on the seller's reputation. If you can't, consider it a red flag. Avoid impulse buys. Auctions don't always deliver the best price.
Do your research first to determine fair market value.
and CompareNet are good sources for this.
See also Comparison Shopping.
Determine who will pay for shipping and return policies.
If you bid at a person-to-person auction and win, you will probably be asked to send a personal check to a stranger. Look for sellers with a clean history.
Ebay offers a "Feedback Forum" where buyers and sellers can post comments about a seller, which form the seller's "feedback rating." The higher the number, the better chance you're dealing with an honest individual. But the system isn't foolproof - sleazy sellers sometimes give themselves false praise. Make sure you bid carefully, you most likely will not be able to withdraw. If a deal seems too good to be true, it probably is. Pass it by.
How to Sell Create an honest, but attractive description of your item.
Use pictures if possible.
Price your item to sell, but not lower than you are willing to sell for. If you are willing to spend a little extra, consider boldfacing your listing or paying for additional exposure on the auction site.
Respond to all inquiries about your item as soon as possible. Once the auction ends, get in contact with the bidder as soon as possible. Once payment or other terms of the agreement are met, fulfill your portion of the agreement by delivering the auctioned item.
If you are weary of buying items from a complete stranger, online auctions might not be for you.
Escrow companies facilitate a transaction between two parties by accepting payment from a buyer and holding onto it until the buyer receives the item and accepts it; only then is payment released to the seller.
A site called iescrow.comwill act as an intermediary between auction buyers and sellers for a small transaction fee. If you win, you pay iescrow first, the seller ships you the goods, you approve the sale, and iescrow pays the seller.
Dutch Auction Term used to describe an auction of two or more identical items that allows all buyers to purchase the items at the lowest successful bid.
Reserve Price Auction An auction where the seller sets a "reserve price" or the lowest price he or she is willing to sell an item for. This amount is generally higher than the minimum bid. In order to win the auction, a bidder must meet or exceed the reserve price and have the highest bid. If no bids meet the reserve price, the transaction will not take place.
Shilling When the seller of an item bids up their own item or asks another person to do so. This is a practice looked down upon in the auction community!
Sniping The practice of placing a bid in the closing minutes or seconds on an auction. Pretty sneaky practice, but there are ways to avoid getting burned by snipers. See eBay's description of Proxy Bidding.
Report Fraud The following sites keep an eye out for fraudulent vendors. If you've been burned, report your incident. If you don't want to get burned, visit these sites before partaking in the process. Internet Fraud Watch, US Consumer Gateway, Federal Trade Commission: E-Commerce and the Internet, Better Business Bureau.