Auctions

Question 1

a) The English and Dutch auctions

English auctions are also referred to as open ascending auctions. They are auctions where the parties involved bid against one another. This leads to a gradual rise in the prices of the items in the auction (McAfee, 2017). Moreover, there are starting prices that are set by the auctioneers and bidding is done electronically or vocally. Bids are closed when none of the bidders can offer a higher price for the products. The Dutch auctions are usually used when selling bulk items and they start at higher prices above the values of the items that are being sold.  The prices gradually decline and the highest bidders are able to purchase the items. However, they have a price within which the auctioneer cannot go below. The similarities between both forms of auction is that they highest bidder gets to purchase the items (Krishna, 2012). Another similarity is that both auctions have a set price within which the auctioneer cannot go under.  The main difference is that the British auction starts at lower prices, which gradually increase with bidding, while the Dutch auction starts at a higher price, which declines with bidding. 

b) The sealed bid first price auction and the Vickery Auction.

This is also known as the blind auction and it is common when selling properties and homes. The bidders usually place only one bid, writes it down and submits it to the auctioneer. The person with the highest bid takes the item (Krishna, 2012). The Vickery auction is also known as the second price bid and in this case, the person who wins the bid usually pays for the item at the price of the second-highest bid. It is commonly used in online bidding.  The similarity between the two auctions is that the bidder bids only once without being aware of the prices that other bidders are offering (Krishna, 2012). The difference is that in the first price auction, the winning bidder purchases the item at the price he/she bid, while in the Vickery auction, the winning bidder takes the items at the second highest bid price. 

Question 2

Weaknesses of English auction in uncovering a property’s value

The main weakness of the English auction in uncovering a property’s value is that it influences the bidder’s perception of the value of the item. Since English auctions expose the prices that other bidders are willing to purchase the item, higher bids inadvertently force the bidder to adjust his/her bid upwards, without regard to the actual value of the item. The bidder assumes that the item must cost more if other bidders have increased their bids.  This may not be the case, and it is possible for some bidders to manipulate the perception of an item’s cost by bidding upwards, so that other bidders can also bid higher and ultimately pay for a perceived value that is way above the real value of the item (Adam et al., 2011).

Recommendation on alternative auction that uncovers value better

The Vickery auction may provide a better way of uncovering the value of items purchased during auctions. This is because the bidder is not influenced by other bidders’ prices when making the bid, since this information is not available. The bidder is therefore able to make a personal and objective judgment of the value of the item. Moreover, if the bidder wins the bid, he will pay for the second highest bid, which will be cheaper than his/her bid price.  This price will likely reflect the accurate value of the item being purchased. 

Question 3

The first use of auction is in the antique business. In this auction, the auctioneer organizes a variety of items to be auctioned and advertises the venue of the auction to prospective bidders.  Most forms of antique auctions also serve as entertainment and socialization events, where people can gather to view and purchase rare antiques. The British auction is usually used in the antique auction business. This form of auction is used since antiques are rare and people are usually willing to pay the highest prices to access rare commodities (Krishna, 2012). 

The second use of auction is the sale of livestock. In this auction, sellers place their animals in a pen within the auction yard. Then one at a time, each pen is taken to the sales ring and a digital display reveals the weight of the animals.  The buyers bid for the cattle while displaying their numbers and the auctioneer records the winning bid numbers. In many cattle auctions, the Dutch auction strategy is applied. This is because a large variety of items are being sold and the highest bidder gets to take the first pick of the best animals that he/she wants to purchase. 

Another use of auction is in the sale of perishable products such as fish, produce and other types of food. This form of auction typically adopts the Dutch auction format. It involves the sale of many items of food, and prices usually start at a higher value than the typical price of the food item (Krishna, 2012). As the price gradually decreases, the highest bidder has the first pick of the food item, which makes it appealing to people who want the freshest and best picks, and are willing to pay higher prices than the rest of the bidders. 

Question 4

The main advantage of auctions in generating revenue for the not-for-profit organizations is that the products are mostly sold at prices that are significantly higher than their actual cost. Many bidders who participate in these auctions do so for charitable reasons, and they are willing to pay higher prices for items, to help these organizations raise revenues. Auctions therefore help the not-for-profit organizations to raise high revenues while selling low-value items. Another advantage of using auctions when raising revenue for not-for-profit organizations is that they inspire people to participate and lead by example (Adam et al., 2011). When an auction strategy, such as the British auction method is used, people are able to see rival bids by other bidders, and this encourages them to participate in generating revenue for the non-profit. 

One of the weaknesses of generating revenue through use of auctions by not-for-profit organizations is that they are expensive. It is usually costly to book the venue and create the setup where the auction will take place. These costs may reduce the profitability of the auction event for the non-profit (Krishna, 2012). Another weakness is that auctions limit the amount of revenue that the not-for-profit organization can raise. Since bidders are aware that the event is a charity event, they will limit the amount of money they spend, as they know that they will pay higher for low-value items at the auction. 

Question 5

There are different ways in which the company that I work for can use auctions to uncover value and increase revenues.  The first is through using auctions during corporate social responsibility (CSR) and charity events to raise revenues. My organization can embrace auctions to raise revenues for its CSR programs by inviting employees, management, partners and other stakeholders to auctions which seek to raise money for charitable causes. The participants will be willing to pay higher prices for low-value items since they are aware that they are contributing towards charity. 

The second way of uncovering value and raising revenue is through participating in online auctions with the goal of purchasing valuable items at a lower cost, and later selling them at a profit. The Vickery auction is commonly used in this form of auction, and if the company is able to do research on listed items and offer competitive and fair prices, then it may win the bids and pay the second highest bid price. In this case, the organization will have purchased the items at a very competitive price and it can resell them for a profit.

The third strategy is through fixing and selling old and outdated items that are no longer used by the organization. These may range from old furniture, machinery, automobiles and others. Instead of disposing them off, the company may refurbish them at a small cost and auction them to reap a large profit from the venture. The British auction format will be instrumental in pushing the prices of such items upwards (McAfee, 2017). 

References

Adam, M., Krämer, J., Jähnig, C., Seifert, S. & Weinhardt, C. (2011). “Understanding auction 

fever: A framework for emotional bidding”. Electronic Markets. 21 (3): 197–207. doi:10.1007/s12525-011-0068-

Bapna, R., Goes, P. & Gupta, A. (2010). “Insights and analyses of online auctions”. 

Communications of the ACM. 44 (11): 42. doi:10.1145/384150.38416

Krishna, V. (2012). Auction Theory. San Diego: Academic Press,

McAfee, P. (2017). “The Ideal Auction – Numberphile”. YouTube. Retrieved from