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By Konstantin Vasilev Member of the Board of Directors of Cbonds, Ph.D. in Economics
Updated July 1, 2023

What Is an Auction?

An auction is a captivating sales event where potential buyers actively engage in a competitive bidding process to acquire assets or services of interest. This dynamic marketplace allows participants to place bids, either openly or confidentially, creating an exciting atmosphere where buyers and sellers anticipate favorable outcomes. Auctions have gained popularity due to the perception that they offer excellent opportunities for buyers and sellers alike to secure advantageous deals and maximize their asset transactions.


How Do Auctions Work?

Auctions come in different formats, each with its unique dynamics. In an open auction, all prospective bidders have visibility into the bids submitted by others, fostering a transparent and competitive environment. On the other hand, closed auctions operate under a veil of secrecy, where bidders remain unaware of the bids placed by their counterparts. These diverse auction formats can take place in various settings, including live events or through the convenience of online platforms.

Types of auctions

Government Auctions

Government-owned property can enter the market through various means, including normal purchases or as a result of foreclosure. Investors seeking land and other valuable assets often participate in auctions specifically dedicated to government-owned property, presenting an opportunity to acquire these assets at appealing prices.

For instance, let’s consider a scenario where a manufacturing company goes bankrupt and owes a substantial amount of taxes. In such cases, the government may seize the company’s capital equipment, including buildings, machinery, vehicles, tools, and other assets, and auction them off to interested parties, such as other manufacturers. Participating in these auctions becomes advantageous for potential buyers as they can acquire used equipment at a lower cost than purchasing brand-new equipment.

These auctions may take place in different formats, including online auctions facilitated through dedicated platforms. Interested buyers can place bids on the government-owned property, competing with other prospective buyers. The auction process may involve open descending price auctions, where the bidding starts high and gradually decreases until the reserve price or a winning bid is reached. Sealed bids may be utilized, allowing participants to submit confidential offers.

During the auction, bidders compete by placing multiple bids, each bid indicating their bid price. The highest bid determines the winning bidder, who ultimately pays the purchase price for the acquired property. It is important to note that false bids or attempts to raise bids artificially are strictly discouraged, ensuring fairness and integrity in the auction process.

Closed Format Auctions

In various business transactions, such as selling company assets or even the entire company itself, closed auctions play a crucial role. In this format, interested parties present sealed bids to the seller, with the bid amounts remaining confidential and known only to the seller. The seller then has the option to conduct a single round of bidding or select multiple bidders for further auction rounds.

Price is not the sole determining factor during the sale of a company division or the entire company. The seller may have additional considerations, such as preserving jobs for employees. In such cases, if a bidder offers favorable terms for employee continuity, even if their bid amount is not the highest, the seller may choose that bidder as the preferred candidate.

These closed auctions provide a structured and confidential environment for the seller to evaluate offers and make informed decisions. The auction process ensures fair competition among potential bidders, allowing them to present their best proposals while maintaining confidentiality.

Dutch Auction

An open descending price auction, commonly known as a Dutch auction, is a unique type of auction in which the auctioneer initiates the bidding with a high price and progressively lowers it until a bidder submits an offer. The first bid received at or above the reserve price concludes the auction, eliminating the need for intense bidding wars often seen in traditional auction formats.

In financial markets, a variation of the Dutch auction is employed. In this context, investors participate by submitting bids for a security offering, specifying both the desired quantity and the price they are willing to pay. After collecting all the bids, the security price is determined based on the highest price at which the total offering can be successfully sold. Dutch auctions are utilized for various types of securities, including Treasury securities, initial public offerings (IPOs), floating-rate debt instruments, and more.

The term "Dutch auction" originated in 17th-century Holland, where this method was introduced to enhance the efficiency of the fiercely competitive Dutch tulip market. By implementing this innovative approach, participants in the tulip market could establish fair prices for the sought-after flowers, promoting a more streamlined and transparent trading environment.

Today, Dutch auctions continue to be utilized in various industries, providing a distinct and efficient mechanism for determining prices and allocating goods or securities. The auction format’s flexibility and ability to avoid bidding wars make it a valuable tool for achieving optimal outcomes for both buyers and sellers.

Traditional Auctions vs. Dutch Auctions

One notable example of a Dutch auction was employed by Google (now Alphabet Inc.) during its initial public offering (IPO) in 2004. In this unique auction format, potential buyers were invited to submit bids indicating the number of shares they desired and the price they were willing to pay for those shares.

Following the auction, the underwriters carefully reviewed the bids to establish the minimum acceptable bid from the buyers. Eventually, the IPO was priced at $85 per share based on the auction outcomes.

In a broader sense, a Dutch auction is characterized by gradually decreasing the price of an item until a bid is placed. The first bid received becomes the winning bid, leading to a successful sale if the bid exceeds the reserve price. This approach differs from traditional auctions, where the price escalates as competing bidders vie for the item. Notably, Dutch auctions are not commonly used in IPO pricing, making Google’s implementation a notable exception.

How to Buy a House at an Auction

When it comes to purchasing a property, most individuals typically explore online real estate listings or collaborate with a real estate agent. However, a third option for those seeking to buy a home is participating in a property auction.

Property auctions can occur through two main avenues: foreclosure auctions and property tax default auctions. In the case of foreclosure auctions, a home is auctioned off when the homeowner fails to make mortgage payments for an extended period, leading to mortgage default and subsequent foreclosure. The homeowner’s lender can then initiate an auction, compelling the homeowner to vacate the property due to nonpayment. Trustees hired by the bank typically manage these auctions.

Similarly, a property can be auctioned if the homeowner fails to pay the assessed property taxes. In such instances, the unpaid tax authority seizes the property rather than the bank. The auction is typically overseen by local authorities such as the sheriff’s office, clerk’s office, or the comptroller’s office of the county or local tax authority.

Interested buyers can explore options through local government resources, real estate agents, and various online platforms to find home auctions. While purchasing a home at an auction carries significant risks, one potential advantage is the possibility of acquiring the property at a discounted price. Additionally, there may be less competition when buying a home through auction than traditional home-buying.

First-price Sealed-bid Auction

A first-price sealed-bid auction (FPSBA), also referred to as a blind auction, is a prevalent auction format used in various settings. In an FPSBA, all participating bidders independently submit their sealed bids without any knowledge of the bids made by other participants. The key characteristic of this auction is that the highest bidder is the one who wins the auction and pays the price they have bid without any information about the other bids.

Online Bidding

The e-commerce and online auction industry in the U.S. alone is a staggering $934.2 billion market. Online auctions offer a wide range of opportunities, whether you’re searching for discounted items, selling your belongings, acquiring business equipment, or planning your next memorable family vacation. The variety of auction items available is extensive, including real estate, vehicles, aircraft, jewelry, electronics, clothing, and even NASA Shuttle/Hubble equipment.

Can You Back Out of an Auction Bid?

In general, once you place a bid at an auction, it is considered a binding agreement. This means that you are legally obligated to follow through with the purchase if you have the winning bid. However, some exceptional circumstances or specific auction rules may allow for bid retraction or cancellation. It is essential to carefully review the terms and conditions of the auction before participating to understand any provisions regarding bid withdrawal.

In traditional auction settings, such as live auctions, it is uncommon for bidders to be able to back out of their bids once they are accepted. However, online auctions may provide certain mechanisms for bid retraction within a specified timeframe or under certain conditions. These rules vary depending on the platform or auction house hosting the event.

If you are in a situation where you wish to retract your bid, contacting the auctioneer or auction house immediately is crucial to explain your circumstances. They will be able to provide guidance on whether bid retraction is possible and the steps you need to take.

How Does a Silent Auction Work?

A silent auction is a type of auction where bids are placed privately and anonymously on items or experiences displayed for auction. Unlike a traditional auction, where an auctioneer publicly announces bids, participants write their bids on sheets of paper or use electronic bidding systems in a silent auction.

Here’s how a typical silent auction works.

  1. Item Display. The items or experiences available for bidding are displayed at a designated area, often accompanied by descriptions and bid sheets. Each item has a unique identifier or number.

  2. Bidding. Participants browse the items and decide which ones they want to bid on. They write their bid amount and bidder number on the bid sheet corresponding to the item they want. Bids are usually incremental, with a minimum bid increment specified.

  3. Bid Sheets. Bid sheets typically include the item’s description, current highest bid, minimum bid increment, and space for participants to write bids. Participants may also have a bidder number assigned to them for anonymity.

  4. Monitoring Bids. During the silent auction, participants can monitor the bid sheets to see the highest bid on each item. This allows them to decide whether they want to increase their bid.

  5. Outbid Notifications. If someone is outbid on an item, it is common for the auction organizers to provide outbid notifications. This can be done through various means, such as displaying notices near the bid sheets or using electronic systems that send notifications to participants’ devices.

  6. Closing Bidding. At a predetermined time, the auction organizers will announce the bidding closing. This gives participants a final opportunity to place their highest bids on the desired items.

  7. Winning Bids. Once the bidding is closed, the auction organizers review the bid sheets for each item and determine the highest bidder. The highest bidder on each item wins the auction and is typically required to complete the purchase or claim the item.

  8. Payment and Item Collection. After the winners are determined, they are usually directed to a payment area where they settle the amount they bid on the items they won. Once payment is made, participants can collect their items or arrange delivery or pickup.


  • How do you sell items at auction?

  • What sells well at auctions?

  • Is an auction the best way to sell?

  • How do you find a bidder?

  • Do auctions take a percentage?

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