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A bid auction is a forum in which products or services are bought and sold, but not by predetermined prices. Instead, their worth is determined by how much people are willing to pay. Payment offers are made in a competitive atmosphere in which the participants may or may not know the competing bids or who is making them. Some items may have reserve bid amounts, meaning no opening bids less than the reserve amount are accepted, and the item will not be sold if that amount is not met. Other rules may include maximum bid limits, time restrictions and rules regarding private versus commercial bids.
Bid auctions have a long history, but never have gained the popularity of more traditional price-fixed sales or negotiated “bargaining” sales that are common in marketplaces worldwide. Until the popularity of the Internet, bid auctions were mainly used for estate sales and selling livestock or foreclosed properties. In modern times, many popular online sites conduct bid auctions for every legal item and commodity imaginable.
There are four different types of primary bid auctions. They include English, Dutch, sealed first-price and Vickrey auctions. These varieties have been around for hundreds of years and are held in many venues worldwide.
The most popular bid auction is the English auction. It is typically the type portrayed in films and books; it lends itself to high drama since bidders can see each other and exchange glances as the price of the coveted item climbs. The bids are called out by either the auctioneer or the bidders themselves or posted on a publicly displayed electronic board. The bidding ends as soon as the bidders stop bidding, and the item is sold to the highest bidder.
A somewhat convoluted method is involved in a Dutch auction. This auction involves an auctioneer announcing a high bid amount on an item and then methodically lowering it until a buyer accepts the price. In recent years, the term Dutch auction has also gained popularity as a description for an online auction where a group of high bidders purchase identical items at the same time for the same price.
In bidding for intangible items such as government contracts or leases for mining rights, the sealed first-price auction format is commonly used. Each bidder submits a single, secret bid that cannot be changed, retrieved or canceled. The high bid is instantly accepted and the sale is final.
The final type of primary bid auction is called a Vickrey auction. It is also widely referred to as a sealed-bid second-price auction. It follows exactly the same guidelines as the sealed first-price auction with one exception: the auction winner pays the second highest bid amount submitted rather than their own bid. Some online auction sites use this format.