An auction is the process of buying and selling things by offering them up for bid, taking bids, and then selling the item to the highest bidder. Auctioning can be traced as far back as 500 B.C.^[1] In economic theory, an auction is a method for determining the value of a commodity that has an undetermined or variable price. Auctions can be with reserve or minimum, or without minimums, or absolute or no reserve. In reserve auctions, there is a minimum bid or reserve price; if the bidding does not reach the minimum, there is no sale (but the person who puts the item up for auction may still owe a fee to the auctioneer or auction company). In absolute or no reserve auctions, the sale is guaranteed, with only the price left to be determined. In the context of auctions, a bid is an offered price.

Contents [hide] 1 History of the Auction 2 Additional Information 3 Types of auctions 3.1 Primary types of auctions 3.2 Other auction terminology 4 See also 5 Further reading 6 Footnotes

[edit] History of the Auction

However, according to ancient Greek scribes, the more generally accepted auction occurred first in Babylon in 500 B.C. During this period, auctions were held annually, and women were sold on the condition of marriage. It was considered illegal to allow a daughter to be sold outside the auction method. Women with “beauty” engendered higher bidding, women without “beauty” had to pay a dowry to be accepted into the auction, and thus the price would be negative.

During the Roman Empire, following military victory, Roman soldiers would often spear the ground to mark the location of spoils in which goods and property were seized. Roman business agents were said to have accompanied warriors into battle to help facilitate expected sales. The Romans also used the auction to liquidate their own property. For example, Marcus Aurelius is said to have auctioned off prized heirlooms and furniture, (an auction that, as legend has it, lasted over two months). The most legendary auction occurred in the year 193 A.D. when the entire Roman Empire was put on the auction block by the Praetorian Guard. On March 23rd, The Praetorian Guard first killed Pertinax the emperor, and then announced that the highest bidder could claim the entire Empire. Didius Julianus outbid everyone for the price of 6,250 drachmas per Guard, an act that initiated a brief civil war. Didius was then beheaded two months later when Septimus Severus conquered Rome.

During the seventeenth century and emerging soon after the French Revolution, auctions came to be held in taverns and coffeehouses to sell art. Such auctions were held daily, and catalogs were printed to announce available items.

During the American civil war, goods seized by armies were sold at auction by the Colonel of the division. Thus today's auctioneer carries the unofficial title of "colonel".

[edit] Additional Information

Auctions are publicly and privately seen in several contexts and almost anything can be sold at auction. Some typical auction arenas include the following:

• the antique business, where besides being an opportunity for trade they also serve as social occasions and entertainment
• in the sale of collectibles such as stamps, coins, classic cars, fine art, and luxury real estate
• the wine auction business, where serious collectors can gain access to rare bottles and mature vintages, not typically available through retail channels
• in the sale of all types of real property including residential and commercial real estate, farms, vacant lots and land
• for the sale of second-hand goods of all kinds, particularly house clearances and online auctions
• in commodities auctions, like the fish wholesale auctions
• in thoroughbred horseracing, where yearling horses are commonly auctioned off; and
• in legal contexts where forced auctions occur, as when one's farm or house is sold at auction on the courthouse steps.

Although less publicly visible, the most economically important auctions are the commodities auctions in which the bidders are businesses even up to corporation level. Examples of this type of auction include:

• sales of businesses
• spectrum auctions, in which companies purchase licenses to use portions of the electromagnetic spectrum for communications (for cell phone networks, for example)
• timber auctions, in which companies purchase licenses to log on government land
• electricity auctions, in which large-scale generators and consumers of electricity bid on generating contracts
• environmental auctions, in which companies bid for licenses to avoid being required to decrease their environmental impact
• debt auctions, in which governments sell debt instruments, such as bonds, to investors. The auction is usually sealed and the uniform price paid by the investors is typically the best non-winning bid. In most cases, investors can also place so called non-competitive bids which indicates an interest to purchase the debt instrument at the resulting price, whatever it may be
• auto auctions, in which car dealers purchase used vehicles to retail to the public.

Major auction houses include Christie's, Sotheby's, Lyon & Turnbull and Bonhams. Internet auctions such as Ebay and Bidsouth have become very popular.

Auction catalogs are frequently printed and distributed before auctions of rare and/or collectible items; these catalogs may be very elaborate works, with considerable details about the items being auctioned.

Auctioneers are usually trained in the legal and practical aspects of conducting auctions. Some jurisdictions require auctioneers to be licensed and bonded. In the U.S., some auctioneers who have completed auctioneer school use the title Colonel and are given this honorary title because in the U.S. Civil War, Colonels of the armies were called upon to auction off the spoils of war.

[edit] Types of auctions

[edit] Primary types of auctions

• English auction: This is the type of auction commonly used by the English auction houses like Sotheby's, Christie's, and Phillips. Participants bid openly against one another, with each bid being higher than the previous bid. The auction ends when no participant is willing to bid further, or when a pre-determined "buy-out" price is reached, at which point the highest bidder pays the price. The seller may set a 'reserve' price and if the auction fails to have a bid higher than the reserve, the item remains unsold. A variant popular in the time of Samuel Pepys was 'auction by candle' in which the winning (highest) bid was the last one to be made before a small piece of lit candle died out.^[2]

• Chinese auction: Basically, a raffle.

• Dutch auction: In the traditional Dutch auction the auctioneer begins with a high asking price which is lowered until some participant is willing to accept the auctioneer's price, or a predetermined minimum price is reached. That winning participant pays the last announced price. The Dutch auction is named for its best known example, the Dutch tulip auctions. ("Dutch auction" is also sometimes used to describe online auctions where several identical goods are sold simultaneously to an equal number of high bidders. Economists call the latter auction a multi-unit English ascending auction.)

• Sealed-bid first-price auction: Also known as Sealed High-Bid Auction or First-Price Sealed-Bid Auction (FPSB). In this type of auction all bidders simultaneously submit bids so that no bidder knows the bid of any other participant. The highest bidder pays the price they submitted.

• Sealed-bid second-price auction, also known as a Vickrey auction: This is identical to the sealed first-price auction, except the winning bidder pays the second highest bid rather than their own. This is very similar to the system used by eBay.

• All-pay auction: an auction in which all bidders must pay their bids regardless of whether they win the prize. The highest bidder wins the prize. The all-pay auction is often used to model lobbying (bids are political contributions), or other competitions.

All of the private value auctions listed above are revenue equivalent, in that they all result in the same expected revenue for a seller.

[edit] Other auction terminology

• Silent auction: This is often a variant of an English auction, where bids are written on a sheet of paper, and at the predetermined end of the auction, the highest listed bidder wins the prize. This auction variant is often used in charity events, and many items may be auctioned simultaneously. Participants submit bids normally on paper, near the item. Other variations of this type of auction may include sealed bids. The highest bidder pays the price he or she submitted.

• Digital art auction: In this indefinitely long auction, designed for unreleased works that are trivially reproducible at zero cost (recordings, software, drug formulas), bidders openly submit their maximum bids (which may be adjusted or withdrawn at any time). The seller may review the bids and close with a price of their choosing at any time—the successful bidders that pay this price are those whose bid meets or exceeds it, and these are the only bidders who receive a copy of the item.

• Open outcry auction: This type of auction can refer to any auction where the auction is conducted orally for people to hear. This type of auction also refers to what is used in stock exchanges and commodity exchanges, where trading occurs on a trading floor and traders may enter verbal bids and offers simultaneously. Transactions may take place simultaneously at different places in the trading pit or ring. This type of auction is being replaced by electronic trading platforms.

• Unique bid auction: In this type of auction users post blind bids and are given a range of prices they can place a bid in, often a capped limit. The highest, or lowest, unique bid wins. For instance an auction is given a maximum bid of 10. If the top five bids are 10, 10, 9, 8, 8 then 9 would be the winner being the highest unique bid. This a popular online type of auction.

• Buy-out auction: This auction has a predetermined buy-out price in which the bidder can end the auction by accepting the buy-out price. The buy-out price is set by the seller. The bidder can choose to bid or use the buy-out option. If no bidder chooses to utilize the buy-out option, the auction ends with the highest bidder winning the auction.

• Combinatorial auction: A combinatorial auction is an auction in which bidders can place bids on combinations of items, or “packages,” rather than just individual items.

• Absolute auction, also known as an Unreserved Auction, No-reserve Auction or Auction Without Reserve, is an auction with no minimum bid amount, no set starting bid, no seller confirmation of the high bid price, and no buybacks of the property being offered by the seller of any agents of the seller. The highest bidder will purchase the property no matter the high bid price. This type of auction is designed to attract the maximum participation from the buying public as the seller has committed to convey their property to the highest bidder without limitation. It does offer buyers excellent opportunities from time to time, however. A 2003 Virginia statute defines an absolute auction as "an auction where at the time of the auction sale the real or personal property to be sold will pass to the highest bidder regardless of the amount of the highest and last bid."

In terms of security/privacy, there are two main types of auctions:

• In a private auction the identities of the bidders are hidden, so anyone that buys the item can remain anonymous. This is normally done for either security reasons such as rare gems or art, or to avoid embarrassment if the item is more risque.

• In a public auction, the bidders' identities are not hidden and anyone is welcome to attend the auction.

In terms of auctioneers and auction items, we can differentiate three types of auctions:

• exchange auction - also known as commodity auctions or exchange-commodity auctions, are the most closed to the new participants. The participants include a number of core professional buyers, who monitor each other to ensure that no one is 'cheating' on the community
• sale auction - for art and one-of-a-kind items
• dealer auction - for collectibles, cars or machinery

If more than one identical item is sold, there are two possible generalizations of the second-price auction. In a uniform-price auction, all of the winning bidders pay the price submitted by the highest non-winning bidder. Bidders will not typically bid their true value in a uniform-price auction with multiple units. In a Vickrey (or second-price sealed-bid) auction, the pricing rule is more complicated, but preserves the property that bidders will bid their true valuation. It is also possible to auction each identical item individually. Once each item has been priced, the winning bidder is entitled to buy the remaining goods at the same price. Items the winning bidder opts not to purchase are auctioned again. This system creates a tension between the desire to hold back on bidding since later items will almost certainly be cheaper, and the chance that by losing the first round of bidding all possibility of purchasing will be lost.

Work in the theory of auctions contributed to Vickrey's 1996 Bank of Sweden Prize.