Page 316 - Electronic Commerce

Social Networking, Mobile Commerce, and Online Auctions

are publicly announced; however, there are other types of auctions that use publicly
announced bids that are also called open auctions.
In some cases, an English auction has a minimum bid, or reserve price. A minimum bid is
the price at which an auction begins. If no bidders are willing to pay that price, the item is
removed from the auction and not sold. In some auctions, a minimum bid is not announced,
but sellers can establish a minimum acceptable price, called a reserve price,or simply reserve.
If the reserve price is not exceeded, the item is withdrawn from the auction and not sold.
English auctions that offer multiple units of an item for sale and allow bidders to
specify the quantity they want to buy are called Yankee auctions. When the bidding 291
concludes in a Yankee auction, the highest bidder is allotted the quantity he or she bid. If
items remain after satisfying the highest bidder, those remaining items are allocated to
successive lower (next highest) bidders until all items are distributed. Although all
successful bidders (except possibly the lowest successful bidder) receive the quantity of
items on which they bid, they only pay the price bid by the lowest successful bidder.
To understand Yankee auctions better, consider this example. A seller places nine
items up for bid. When the bidders stop increasing their bids, the successful bidders
include the following: the highest bidder, who bid $85, quantity five; the second-highest
bidder, who bid $83, quantity three; and the third-highest bidder, who bid $81, quantity
four. All three of the successful bidders pay $81 per item, but the highest bidder receives
five items, the second-highest bidder receives three items, and the third-highest bidder
receives the one remaining item, despite having bid for a quantity of four, because only
one is left after satisfying the quantity bids of the higher bidders.
English auctions have drawbacks for both sellers and bidders. Because the winning
bidder is only required to bid a small amount more than the next-highest bidder,
winning bidders tend not to bid their full private valuations, which prevents sellers
from obtaining the maximum possible price. Bidders risk becoming caught up in the
excitement of competitive bidding and then bidding more than their private valuations.
This psychological phenomenon, called the winner’scurse, has been extensively
documented by William Thaler (see the Thaler reference in the “For Further Study
and Research” section at the end of this chapter) and other behavioral economists.

Dutch Auctions
The Dutch auction is a form of open auction in which bidding starts at a high price and
drops until a bidder accepts the price. Because the price drops until a bidder claims the
item, Dutch auctions are also called descending-price auctions. Farmers’ cooperatives in
the Netherlands use this type of auction to sell perishable goods such as produce and
flowers, which is how it came to be known as a “Dutch” auction. In most Dutch auctions,
the seller offers a number of similar items for sale. One common implementation of a
Dutch auction uses a clock that drops the price with each tick. The first bidder to call out
“stop,” which stops the clock, becomes the winning bidder. The winning bidder can take
all or any part of the auctioned items at that price. If any items remain, the clock is
restarted and continues to run until all the items are taken by successive lower bidders.
A Dutch auction is often better for the seller because the bidder with the highest private
valuation will not let the bid drop much below that valuation for fear of losing the item to

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