I was at a charity benefit auction in early December. The was a professional auctioneer running the bidding and he was absolutely amazing. Aside from his amazing sense for the “micro-tactical” issues of running an auction -- knowing what to say, when to pause, when to egg someone one, etc. -- he was also changing up the type of auction based on the item up for bid.
The fancy name for the most common type of auction is “open-outcry, second price.” The open-outcry is pretty clear (as opposed to a sealed-bid or some other means of signaling such as eBay) but the second price part is a little more subtle. Imagine an auction where just two people are bidding, me and you. I’m willing to pay up to $20 (my “reservation price”) for an item and you are willing to pay $30. You will win the item for the minimum bid increment above $20, since that is above my reservation price of $20 – thus the seller gets the second highest price. This should be familiar to anyone who has ever used eBay.
Another type of auction is a Dutch auction. This type of auction is a first-price auction, and is named after the Dutch because they invented this auction as a way to sell large lots of tulips. The price starts very high and is gradually lowered. To use the example from above, where my reservation price is $20 and yours is $30, the auctioneer might start the first bid at $100. The price is then lowered until someone bids, who then wins the item. In this case, you would win the item and pay your reservation price of $30, which is the highest amount that anyone was willing to bid.
There are other interesting variations on this auction, such as the reverse Dutch auction which is useful when auctioning off large numbers of identical items. Many universities use reverse Dutch auctions to efficiently allocate "scarce resources" such as seats in popular classes. W. R. Hambrecht & Company is an investment bank specializes in IPOs using reverse Dutch auctions. The best known Dutch auction in recent memory was the Google IPO.
During one of the auctions the auctioneers did something absolutely brilliant. The item up for bid was a week in an apartment in Barcelona, Spain. The apartment is nicely furnished, near a large market, near public transportation and the buyer could pick any week this summer. The bidding opened at $1,000 and was quickly bid up past $2,500. In the end there were three bidder remaining. Bidders B and C had simultaneously put their paddles up for $2,900. When the price was raised to $3,000, there was silence, and then bidder A, put up his paddle. Once, twice, sold for $3,000 to bidder A.
The auctioneer interrupted the applause, “Hold on, hold on. I’m going to do something a little crazy here” To bidder B: “Would you pay $2,900 for another week in this apartment in Barcelona?” Bidder B said yes. To bidder C: “Would you pay $2,900 for a third week in this apartment in Barcelona?” Bidder C said yes. To bidder A: “You know what, I’m going to give you your week in the apartment for $2,900.”
Once the dust settled, the auctioneer had sold three weeks in an apartment in Barcelona for $2,900 x 3 = $8,700! The auctioneer knew all along that he had three weeks to sell, but he kept this information to himself and let the auction proceed as if there was only the one week.
If he had auctioned off a single, three week block of time in the apartment, my guess is that it would have gone for much less. Conversely, if he had announced that there are three, one week slots in this apartment, it would have changed the dynamics of the auction, and likely ruined the unique nature of the item.
Not to get too technical, but one could argue that he simply sold three items at the “third price” of $2,900, since $3,000 was the second price. This is true, but I would argue that the competition among the bidders would not have been as intense if three separate actions had been held. These were not particularly experienced bidders, and I would guess that they increased their reservation price as the auction heated up.
I thought this was fascinating.