Today, auctions have come a long way since the days when businesses generally used them only for reclaiming their investments in machinery, in automobiles, and in the other tools of their trade. Now auctions have come into the computer age and have changed the way businesses think about procurement and selling goods and services. Many people new to the world of auctions - both on- and off-line - may not realize that there are a wide variety of auction logics being used to set the rules for numerous auction events.
In this case, the term logic refers to a sequence of instructions which is part of the software and which sets the pricing rules for an auction event. Software developers have attempted to create logic systems that imitate the same types of auctions that are conducted in the brick and mortar world. For example, there are several major types of auction logics: first price, second price, English, and Dutch.
First price auctions are fairly traditional auctions. A good or service is offered up for bidding. Participants place bids in an effort to compete with the other bidders but while also trying to keep the price low so that they can get a good deal on the items. When the auction is over, the highest bidder wins and pays his bid. One thing that does make this type of auction different than English and Dutch auctions is that all the bids are sealed so that no one knows how much the other participants have bid.
Second price auctions, also known as Vickrey auctions, are somewhat different. In these auctions, participants place their bids as with first price auctions. At the end of the simple quantity second price auction auction, however, the winner does not pay his bid but pays the highest losing bid. For example, Bidder A wins the auction by bidding $400. He beats out Bidder B who placed a bid of $350. Bidder A then has to pay $350 and not $400 to the seller. Like, first price auctions, however, all bids are sealed and are not viewable by the participants.
Another type of auction logic is the English auction. With English auctions, the prices are not sealed because these types of auctions were traditionally run by auctioneers in public. With online auctions, the seller gets to act as auctioneer while the software itself tracks the bids. In this type of auction, a low price is announced to start the auction. Bidders then raise that price in increments until no more bids are offered. At that time, the highest bidder is considered the winner.
Finally, there are Dutch auctions. Like with English auctions, bids are known by all participants because these auctions were traditionally handled by auctioneers as well. In these auctions, the auctioneer called out a very high price for the item. He then lowered the price in specific increments until someone accepts the price. Some confusion has been caused over the definition of the Dutch auction because a third-party online auction site has labeled other, non-Dutch auctions as being Dutch.
All of these types of auction logics each have their own benefits and their strategic uses. Sealed auctions, such as first and second price auctions, generally are more useful at driving prices higher for a smaller number of participants than more open auctions. The reason is that when people cannot use other bidders' prices as a guide, they tend to bid higher than they normally would. Participants in English auctions are usually the most bidder-friendly because it gives them an advantage. They can see the other bids and can use them to help determine how much to bid themselves. Dutch auctions are trickier because to be effective a bidder must have some idea of how low the bidding will go before it is accepted. For example, if the bidding starts at $1000, then goes to $900, then to $800, the anxious bidder may go ahead and accept that price even though it could have went all the way to $500 without being accepted.
All auction logics can be used by businesses to increase revenue and/or to decrease costs. Businesses simply need to pick the right logic for their needs. And to understand these logics to determine which logic is right for their auction event.