10.3 Third Party as a Source of Remuneration 347Dutch auction); the first-price sealed-bid auction; and the second price sealed-bid
auction (the Vickrey auction).^85
The first-price sealed-bid price auction^86 means that all bidders simultaneously
submit bids so that no bidder knows the bid of any other participant. The highest
bidder pays the price that it submitted.
In an English auction, 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. The highest bidder pays the price.
The second-price sealed-bid auction is also known as the Vickrey auction after
William Vickrey (Nobel Price in Economics in 1996).^87 In the Vickrey auction,
the winner is the highest bidder, but the winner pays the second-highest bid rather
than the winner’s own bid. The Vickrey auction makes it easier for the seller to
obtain information about the highest price that a bidder is willing to pay. Interest-
ingly, Johann Wolfgang von Goethe used a similar auction mechanism already in
1797.^88 Ebay is one of the best-known users of the Vickrey auction.
The Dutch auction means that the auctioneer begins with a high asking price.
The asking is lowered until some participant is willing to accept the auctioneer’s
price, or a predetermined minimum price is reached. The winning participant pays
the last announced price.^89
Although there are various auction mechanisms, Vickrey found out that auction
meachanisms are revenue equivalent assuming complete information. This means
that they are – at least in principle – expected to result in the same expected reve-
nue for the vendor.
Reserve price. The seller may set a reserve price. If the auction fails to have a
bid equal to or higher than the reserve, the item remains unsold. If there is no re-
serve price, the auction is called absolute.
Trading on a stock exchange. Trading on a stock exchange involves the use of
auction mechanisms. For example, trading on the NYSE involves the use of two
(^85) Generally, see Paul Klemperer, Auctions: Theory and Practice. Princeton U P (2004);
McAfee RP, McMillan J, Auctions and Bidding, J Econ Lit 25 (1987) pp 699–738.
(^86) Also known as sealed high-bid auction or first-price sealed-bid auction (FPSB).
(^87) See Maskin E, The Unity of Auction Theory: Milgrom’s Masterclass, J Econ Lit 42
(2004) p 1105.
(^88) Johann Wolfgang von Goethe wanted to sell rights to his manuscript Herrmann und
Dorothea to his publisher Hans Friedrich Vieweg by using an auction mechanism. This
is how Goethe described the auction mechanism to Hans Friedrich Vieweg in a letter
dated 16 January 1797: “Was das Honorar betrifft, so stelle ich Herrn Oberkonsistorial-
rat Böttiger ein versiegeltes Billet zu, worin meine Forderung enthalten ist, und erwarte,
was Herr Vieweg mir für meine Arbeit anbieten zu können glaubt. Ist sein Anerbieten
geringer als meine Forderung, so nehme ich meinen versiegelten Zettel uneröffnet
zurück und die Negation zerschlägt sich, ist es höher, so verlange ich nicht mehr als in
dem, alsdann von Herrn Oberkonsistorialrat zu eröffnenden Zettel verzeichnet ist.“ See
Fehr B, Von Goethe erdacht, von Ebay genutzt: Zweitpreis-Auktionen, FAZ, 22 De-
cember 2007 p 21.
(^89) See, for example, section 5.1.5 of Annex I of the Guideline of the European Central
Bank of 31 August 2000 on monetary policy instruments and procedures of the Eurosys-
tem (ECB/2000/7) (as amended).