Page 317 - Electronic Commerce

Chapter 6

another bidder. Dutch auctions are particularly good for moving large numbers of
commodity items quickly.

First-Price Sealed-Bid Auctions
In sealed-bid auctions, bidders submit their bids independently and are usually prohibited
from sharing information with each other. In a first-price sealed-bid auction, the highest
bidder wins. If multiple items are auctioned, successive lower (next highest) bidders are
awarded the remaining items at the prices they bid.
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Second-Price Sealed-Bid Auctions
The second-price sealed-bid auction is the same as the first-price sealed-bid auction except
that the highest bidder is awarded the item at the price bid by the second-highest bidder. At
first glance, one might wonder why a seller would even consider such an auction because it
gives the item to the winning bidder at a lower price; however, it yields higher returns for the
seller, encourages all bidders to bid the amounts of their private valuations, and reduces the
tendency for bidders to collude. Because the winning bidder is protected from an erroneously
high bid, all bidders tend to bid higher than they would in a first-price sealed-bid auction.
Second-price sealed-bid auctions are commonly called Vickrey auctions, named for William
Vickrey, who won the Nobel Prize in Economics for his research on this auction type.

Open-Outcry Double Auctions
The Chicago Board Options Exchange conducts open-outcry double auctions of
commodity futures and stock options. The buy and sell offers are shouted by traders
standing in a small area on the exchange floor called a trading pit. Each commodity or
stock option is traded in its own pit. The action in a trading pit can become quite frenzied
as 20 or 30 traders shout offers aloud. Double auctions, either sealed bid or open outcry,
work well only for items of known quality, such as securities or graded agricultural
products, that are regularly traded in large quantities because such items can be
auctioned without bidders inspecting the items before placing their bids.

Double Auctions
In a double auction, buyers and sellers each submit combined price-quantity bids to an
auctioneer. The auctioneer matches the sellers’ offers (starting with the lowest price and
then going up) to the buyers’ offers (starting with the highest price and then going down)
until all the quantities offered for sale are sold to buyers. Double auctions can be operated
in either sealed-bid or open-outcry formats. The New York Stock Exchange conducts
sealed-bid double auctions of stocks and bonds in which the auctioneer, called a
specialist, manages the market for a particular stock or bond issue. The specialist
company must use its own funds, when necessary, to maintain a stable market in the
specific security it manages. Although the specialist system has been in use for more than
a century, critics have charged that specialists can and do use their knowledge to enrich
themselves at the expense of investors. In 2007, the New York Stock Exchange added an
electronic trading system that automatically matches buyer and seller offers and bypasses
specialists. This system now handles most of the trading volume on the exchange.

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