What Is a Sealed-Bid Auction?

A sealed-bid auction is an auction in which a person bids on an item without knowing the amounts other people are bidding. Normally bidders submit only one bid by a specified deadline, which sometimes is the same day bidding opens. The host of the auction declares the person with the highest bid the auction winner. If that winner defaults and doesn't pay as promised, the host can take the next highest bid or put the item up in another sealed-bid auction.

In an open auction, bidding is public, meaning that all participants are able to see or hear what bids are offered. The ability to have bid information allows participants to decide whether they want to increase their bid, and bidding continues until no one else is willing to submit a new bid amount. With a sealed-bid auction, however, people have to submit single bids based on the value they believe the item on auction has. The trouble is that, although market value can provide clues as to what an appropriate bid is, bidders do not know whether they are submitting a bid that is high enough to secure the item. In the same way, they do not know if their bid amount far exceeds other bids and thus put themselves at risk for overpaying.

Understanding the quirks of a sealed-bid auction, one benefit these auctions have is that they tend not to be as intense as open auctions. In most cases, the bidder must submit the bid formally in writing to the host. This allows the host to easily compare all bids, which is necessary because the host cannot rely on the incremental, one-right-after-the-other bid increases that happen in the regular bidding scenario. Often, bidders can submit the bid without even traveling to the auction site, such as with a sealed-bid online auction. It is easier for the host to complete the auction without conflict as a result.

Two basic principles of a sealed-bid auction are that the number of bidders should kept as large as possible and that the host should not volunteer an appraisal value of the auction item. Both principles are based on the idea that the host's goal is always to get as much money from the top bid as possible. Allowing more bidders into the auction sometimes can increase the winning bid amount, because people know there is more competition. Keeping the professionally-given value of the item secret is advisable because the value implies that bids should not exceed that amount. It is up to the bidder to figure out what to pay based on his own research and emotional attachment to the auction item.