and higher bids, and the last and highest bid claims the item. The English auc-
tion enjoys a secure place in a bewildering variety of settings—the sale of art
and antiques, rare gems, tobacco and fish, real estate and automobiles, and liq-
uidation sales of all kinds. By contrast, in a sealed-bid auction, buyers submit
private bids, bids are opened, and the highest bidder claims the item and pays
its bid. The sale of public and private companies has been accomplished by
sealed-bid auction as have the sales of real estate, best-seller paperback rights,
theater bookings of films, U.S. Treasury securities, and offshore oil leases, to
name a few. A third kind of auction method is the Dutch auction, used in the
sale of a variety of goods but especially in the sale of flowers in Holland. The
auctioneer’s initial price is set very high, and then the price is lowered at inter-
vals. The first buyer who announces a bid obtains the item at the current price.
Auctions are also a common means for conducting competitive procure-
ments. Here, a single buyer solicits bids from a number of competing suppli-
ers with the objective of obtaining the lowest possible price. In complex
procurements, the ultimate objective is best thought of as source selection.
The buyer seeks to select the “best” supplier, measured not only in terms of
price but also product quality, management capability, service performance,
and the like. The most common institution for complex procurements is the
submission of sealed bids (possibly in multiple rounds) before the buyer
makes a final selection.
Whatever the particular institution or setting, auctions share the common
feature that competition exists on only one side of the market. The auctioning
party occupies a monopoly position and faces competing buyers or sellers. The
auction determines at once with whom a transaction will take place and at what
terms. Thus, the study of auctions raises two main questions: As a competitor,
how should a firm bid to maximize its profit? In turn, how can the auctioning
party design competitive bidding institutions for maximum advantage? This
chapter considers each of these issues in turn.THE ADVANTAGES OF AUCTIONS
Competitive bidding institutions are widespread because of the advantages they
bring in obtaining the best price. As a means of effecting transactions, auctions
take a place alongside competitive markets, posted prices, and negotiated trans-
actions. Auctions are viable when a well-functioning, competitive market fails
to exist. In other words, a producer of a standardized good that is bought and
sold in a competitive market at predictable prices hardly can expect to have
much success holding its own auction; any would-be buyers already can obtain
the good from the market at the best available price. Thus, a prerequisite for
an auction sale is that the good be differentiated from others. Indeed, auctions
are a ready means of sale for unique items: artwork, antiques and other rare
objects, paperback rights, oil and mineral leases, and the like.670 Chapter 16 Auctions and Competitive Biddingc16AuctionsandCompetitiveBidding.qxd 9/26/11 1:09 PM Page 670