The following video describes auctions as price discovery mechanisms https://www.youtube.com/watch?v=4kWuxfVbIaU Use the video on auctions and at least 3 academic and/or high-quality business publicat
Running head: AUCTION 0
AUCTIONS
Marquita Phillips
Dr. Phyllis Isley
ECO 550: Managerial Accounting
19-08-2019
Similarities and Differences
English Auction versus Dutch Auction
The Open Ascending Price Auction is the most popular type of auction. We know it better as The English Auction. The way that an English auction works is what you probably already have in mind. From what you have seen on television or have witnessed in real life. It is basicallay a bidding war, with the price of the sale going higher and higher until only one person has the highest bid and they of course become the winner of the item they were bidding on. Placing a bid in an English Auction is done by electronic means or vocally, just yelling out. There is always a starting price. The starting price is basically the lowest amount that they seller is willing to let the item go for. Of course no seller wants the low ball numbers and often hope that by having a low starting price for the bid, it will attract more sellers and with more sellers, comes the chance for a higher price. An auction is over when the bid reaches its maximum value, and no participant is willing to offer a higher amount. A negative aspect of the English Auction is that buyer may offer a price that is higher than the real value of the product. Additionally, the requirement of constant and proper communication sometimes can be a little difficult and expensive (Coppinger, Smith & Titus, 2010).
Descending Price Auction, which is also better known as, the Dutch Auction is a type of auction where the bidder starts bidding at a higher price than the original value of the items being bidded on. The owner or auctioneer of the product starts at a higher price and gradually lowers the price of the items. However, the price cannot go beyond the holding price. This auction type is intended for bulk items, and here the seller specifies the number of identical items to sell at a minimum price. In Dutch auctions, both the highest bidder and the earliest bidder are winners for the available quantity of products. It is also important to note that in a Dutch auction, mainly perishable items, such as crops, fish, and other food items are sold (Coppinger, Smith & Titus, 2010).
One major difference between English Auctions and Dutch Auctions is the way that the pricing for the bidding is done. English Auctions uses an ascending price auction, meaning the bid is always started at the lowest price acceptable and end at the highest price that someone is willing to pay. Dutch Auction uses a descending price auction. As you can imagine descending means they start at the highest price acceptable and work backwards to gradually lower the price. In English Auctions most of the products are non-perishable items and sold in single numbers, while the Dutch Auctions products are mainly perishable items that are sold in bulk. (Coppinger, Smith & Titus, 2010).
Vickery Auction and Sealed Auction
The Sealed Bid First-Price Auction, also known as Blind Auction, is where the bidder gets only one chance to bid. Alternately, all bidders concurrently submit sealed bids, so that no one knows each other’s' bid amount. The highest bidder pays the price of the bidding amount.
Vickery Auction is also known as Second Price Sealed Bid, in which bidders submit bids without the knowledge of the other bidders. The winning bidder pays the second-highest bid, rather than his bid. It is quite similar to the first-price sealed bid auction. Although they are almost similar, the distinction between the two types of the auction is that in Vickery auction, the winner pays the second-highest bid, rather than the bid he has won.
English Auction Flaws
The way that the English auction works is that the bidders are actively trying to outbid each other, with each bid being higher than the previous bid. Bidders are free to call out their bids vocally or electronically. As a result, bidders are aware of other bidder’s prices. One of the significant weaknesses associated with this type of auction is bidder’s curse. One bidder may place a bid of a price higher than the value of the product to create a false impression of the value of the product. For instance, Concierge Auctions has been accused of severally for manipulating bids to juice up the businesses. Notably, the company drummed up high bids of about $14 million for Joanne Brown’s apartments, whose real value was $3 million (Clarke, 2019).
Ascending auction (English auction) provides bidders with information throughout the bidding process. The information is a two-edged sword. The information may arouse competition by creating a reliable process of price discovery, by reducing the winner’s curse, and by allowing efficient aggregations of items. Alternately, the bidders may use the information to establish and enforce collusive outcomes (Clarke, 2019).
Although English auctions may harvest many sales for the company through high prices establish during an auction, the value of the real estate may not be established, especially when the bidders are inexperienced buyers. Through their overbid, they may be exposed to the winner’s curse, thus buying the property at a premium. Another downside of an auction is that some of the attractiveness variables may be omitted attributing false impression to the property. Some of the strategies to create a false impression of the property may be accomplished through media attention and other sales mechanisms (Clarke, 2019).
Regardless of the flaws involved English auctions demonstrates, it remains the most efficient auction method. Agreeably, each auction type has downsides and upsides, which when compared to those of English auction, are found to be more adverse. Escalation of bids establishes the agreeable value of the property. The bidders do not have a fixed value for an item. Instead, they learn from each other’s bidding and adjust the value to the most agreeable value. The process is efficient when conducted under certain conditions and when others do not have sufficient information to make auction decision. The method is efficient and maximizes revenue and the fact that the method reveals that the winners are willing to par at least the amount bid (Cramton, 2018).
Instead of Concierge Auctions switching to another form of auction, the company needs to strengthen its moral standards. According to the journal, the underlying problem is not the method of auctioning but the people carrying out the process. The company does not have moral standards and ethical behavior. It is, therefore, recommended for the company to review its moral and ethical standards in an auction. Even though other better auction strategies may be established, the company may still face legal suits for unethical behavior. Let the company and its management adhere to integrity, straightforwardness, and openness in auction processes.
Uses of Auction
Auction is the process of selling and buying products by offering them for bidding. It allows buyers to bid and acquire the product at the highest prices achieved. The bidders compete against each other by placing bids with each subsequent bid being higher than the previous one (for the case of English Auction, which is most common). Once an item is placed for sale, the auctioneer begins with a low price figure and gradually increases to the highest price attained by a buyer. Alternately, the auctioneer places a very high price on the item and gradually reduces the prices to the level the first buyer is willing to pay (Coppinger, Smith & Titus, 2010).
Auction theory is essential in determining the social price and value of the item under sale. Besides, auction prevents overpricing and underpricing of products due to market forces. Auction regulates pricing of items in the product and service markets. Application of the auction theory can be seen as the commn link between the auction theory and information that is based on the corporate finance theory. Auctions are used to help individuals understand the practices used in financial institutions and markets such as underpricing and overpricing of products. Auctions can also help with services in the IPO markets and non-cash bids in takeover markets as well as the discrimination against certain bidders.
E-businesses also have auctions applied in their transactions. The buyers are considered the bidders and the auctioneers are considered the sellers. As the name suggests E-business is done all online and all transactions are done electronically. E-commerce application of auction may involve long-distance auctioneering through various electronic devices between B2B, B2C, and C2C. It also applies to online stock exchanges in which bidders quote their stock prices, and the auctioneers decide on the winning bids. Search engines also use a form of auction to help improve the allocation of sponsored ad slots. Higher bids win more slots for sponsored ads on various search engines.
Auctions means of revenue generation in Not-for-profit organizations
Advantages
Auctions raise income at a higher rate than expected as many would invest much of their profit share back into CSR activities
Auctions help in generating interest income making prices better
There is a probability of getting much value because fair value is taken as base value hence higher value obtained
Disadvantages
Potential bidders may fail to follow formalities which are tiresome and cumbersome
Additional overhead costs arising from legal and solicitors costs reduce the level of income for the organization.
Using auction to uncover value and increase revenue
English auction raises more revenue than first-price auctions only when the bidders do not encounter the winner’s curse. The company should employ this type of auction to increase revenue
Allowing bidders to reserve and upset prices and inform other bidders on such changes to indicate the fair value of the property or product under sale
The auctioneers should be allowed to use puffers, who are employed to raise the price by fictitious bids.
References
Clarke, K. (2019, February 7). Luxury Real-Estate Firm Concierge Auctions Fights Allegations of Fraudulent Bids. Retrieved from https://www.wsj.com/articles/luxury-real-estate-firm-concierge-auctions-fights-allegations-of-fraudulent-bids-11549568689
Coppinger, V. M., Smith, V. L., & Titus, J. A. (2010). Incentives and behavior in English, Dutch, and sealed‐bid auctions. Economic Inquiry, 18(1), 1-22.
Cramton, P. (2018). Ascending Auctions. European Economic Review 42 (5), 745-756.
