Meeting 1

Auction
What Is an Auction?
An auction is a sales event wherein potential buyers place competitive bids on

assets or services either in an open or closed format. Auctions are popular because
buyers and sellers believe they will get a good deal buying or selling assets.
KEY TAKEAWAYS
• An auction is a sale in which buyers compete for an asset by placing bids.

• Auctions are conducted both live and online.
• In a closed auction, for example, the sale of a company, bidders are not aware of
competing bids.
• In an open auction, such as a livestock auction, bidders are aware of the other
bids.
• Examples of auctions include livestock markets where farmers buy and sell
animals, car auctions, or an auction room at Sotheby's or Christie's where
collectors bid on works of art.
How Auctions Work
In an open format, all bidders are aware of the bids submitted. In a closed format,
bidders are not aware of other bids. Auctions can be live, or they can be conducted
on an online platform. The asset or service in question is sold to the party that places
the highest bid in an open auction and usually to the highest bidder in a closed
auction.
Example of Auctions
Open Auctions
In an open auction, parties come together at a physical venue or online exchange to

bid on assets. An interested party is aware of the competing bid amounts and
continues to raise their bid until they are either declared the winner of the auction
(i.e., they submitted the last highest bid within the auction time limit) or until they
decide to drop out of the bidding.
Examples of auctions include livestock markets where farmers buy and sell animals,
car auctions, or an auction room at Sotheby's or Christie's where collectors bid on
works of art. Leading online marketplace eBay is a host of online auctions.
Example of Auctions
Closed Format Auctions
In many business transactions, including the sale of company assets or an entire

company, auctions are conducted in a closed format whereby interested parties
submit sealed bids to the seller. These bid amounts are only known by the seller.
The seller may choose to hold just one round of bidding, or the seller may select
two or more bidders for an additional auction round.
In a situation wherein a division of a company or the whole company is up for sale,

price is not the only consideration. The seller, for example, may want to preserve as
many jobs as possible for its employees. If a bidder does not submit the highest price
but can offer the best terms for continuity for employees, the seller may select that
bidder.
Example of Auctions
Government Auctions
Property may become government-owned property through normal purchases or if it

is foreclosed on for failure to pay taxes, or for other reasons. Investors interested in
land and other assets can attend an auction of government-owned property, which
may ultimately be sold at attractive prices.
For example, suppose that a manufacturer declares bankruptcy. If the manufacturer

also owes a substantial amount of taxes, the government may seize its capital
equipment, including buildings, machinery, equipment, vehicles, and tools, and
auction it off to other manufacturers. There is an incentive for other manufacturers
to buy these capital goods at auction because they are able to pay less for the used
equipment than they would if they purchased brand-new equipment.
Example of Auctions
Traditional Auctions vs. Dutch Auctions

A variant of the traditional auction is a dutch auction. Google (since renamed as
Alphabet Inc.) used this process when it issued its initial public offering (IPO) in 2004.
In this form of auction, prospective buyers submit bids including the number of
shares desired and the amount they are willing to pay for those shares.
In the case of Google, after the auction, the underwriters sorted through the bids to
determine the minimum bid they would accept from buyers. The IPO was priced at
$85 per share.1
A Dutch auction also refers to a type of auction whereby the price of an item is
lowered until there is a bid. The first bid made is the winning bid and results in a
sale, assuming that the price is above the reserve price. This is in contrast to typical
options, where the price rises as bidders compete. Dutch auctions are rare in the
pricing of IPOs.
Advantages and Disadvantages of Auctions
There are both advantages and disadvantages of auctions. Sometimes people can
find rare items at auctions. And there is always the possibility that a buyer can
purchase an item at a discount at an auction.
In the case of purchasing property through an auction, this process can deter some
potential buyers because of its competitive nature.
When it is the sale of company assets or an entire company, there are many
advantages for the seller because they control the entire auction process. They can
create a competitive environment in order to maximize their bargaining power, and,
ultimately, achieve a higher price.
On the other hand, the price of running an auction sale can be significant. The seller
must have a strategy for the auction process, and this requires the service of both
financial and legal advisers.
While securing a bargain is always a possibility, if there are multiple bidders, it is also
possible that the buyer in an auction will actually pay more because of the potential
competition of other bidders.
Pros of Auctions
• Seller controls process
• Find rare items
• Buy at a discount
• Seller can maximize bargaining power
Cons of Auctions
• Competitive process can deter some buyers
• Cost of running an auction is significant
• Competitive bidding process can drive up price
Taken from: https://www.investopedia.com/terms/a/auction.asp

Meeting 1

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Meeting 1

Uploaded by

Copyright:

Available Formats

Auction

An auction is a sales event wherein potential buyers place competitive bids on

• An auction is a sale in which buyers compete for an asset by placing bids.

In an open auction, parties come together at a physical venue or online exchange to

In many business transactions, including the sale of company assets or an entire

In a situation wherein a division of a company or the whole company is up for sale,

Property may become government-owned property through normal purchases or if it

For example, suppose that a manufacturer declares bankruptcy. If the manufacturer

Traditional Auctions vs. Dutch Auctions

Taken from: https://www.investopedia.com/terms/a/auction.asp

You might also like