Appendix E
Auction Types

According to Klemperer (2004) there are four basic types of auctions.1

  • Ascending bid, or English auction, in which bidders (or the seller) bid higher and higher until the highest bid wins the good. Bids can be submitted by open outcry or signal. Increasingly, however, such auctions are being held electronically;

  • The descending bid, or Dutch auction, in which the price is lowered until someone agrees to the price;

  • The first price, sealed-bid auction, in which the buyers put in secret sealed bids and the highest bidder wins the good at the bid price; and

  • The second price, sealed-bid auction, or Vickery auction, in which buyers put in sealed bids and the highest bidder wins the good at the second highest bid price.

An early theoretical result from auction theory is that under risk neutrality, independent values, free entry, and competitive bidding, the four mechanisms yield identical expected revenue and each bidder should bid his or her estimate of the true value for the object. If buyers are risk averse, expected revenues are higher for the ascending bid, but such a bid type attracts the fewest bidders. Furthermore, bidding may be used to signal colluding bidders. Thus in the helium market, where

1

Paul Klemperer, Auctions: Theory and Practice (Princeton, N.J.: Princeton University Press, 2004).



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Appendix E Auction Types According to Klemperer (2004) there are four basic types of auctions.1 • Ascending bid, or English auction, in which bidders (or the seller) bid higher and higher until the highest bid wins the good. Bids can be submitted by open outcry or signal. Increasingly, however, such auctions are being held electronically; • The descending bid, or Dutch auction, in which the price is lowered until someone agrees to the price; • The first price, sealed-bid auction, in which the buyers put in secret sealed bids and the highest bidder wins the good at the bid price; and • The second price, sealed-bid auction, or Vickery auction, in which buyers put in sealed bids and the highest bidder wins the good at the second highest bid price. An early theoretical result from auction theory is that under risk neutrality, independent values, free entry, and competitive bidding, the four mechanisms yield identical expected revenue and each bidder should bid his or her estimate of the true value for the object. If buyers are risk averse, expected revenues are higher for the ascending bid, but such a bid type attracts the fewest bidders. Furthermore, bidding may be used to signal colluding bidders. Thus in the helium market, where 1 Paul Klemperer, Auctions: Theory and Practice (Princeton, N.J.: Princeton University Press, 2004). 0

OCR for page 130
aPPendix e  there are few bidders and each has significant market power, the ascending open auction is likely not the best choice. Sealed-bid auctions tend to attract the most players. Since it is easier to collude in a second price, sealed-bid auction, a first- price, sealed-bid auction is the best choice for helium sales. Such sales, however, would require open access to the Cliffside reserves or to swaps, and this access would require monitoring by BLM or some other regulatory body.