A request

A Dutch auction is an auction where a high price is selected and the price is slowly reduced until a buyer is found.

At a regular auction a price is quoted low and increases bid by bid until no one else wants to better the last.

What produces the better outcome for buyers and sellers – which tends to produce the highest price and which the lowest, or do they reach an equilibrium at the same level? And why?

Any links or a description in the comments would be welcome to scratch my itch.

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One thought on “A request

  1. As with all such transactions, I imagine it all depends on supply and demand.

    My guess is that Dutch auctions are best when supply outstrips demand; a regular auction produces the best outcome when demand outstrips supply.

    The housing market often works on the Dutch auction model, wherein the seller lists at an inflated price and potential buyers offer the lowest price they can get away with while still satisfying the seller. Which might explain the current problem with the housing market in the UK. Demand currently outstrips supply, so buyers are probably offering more than the inflated list price, thus distorting the market even further. It’s good for the sellers, obviously, until prices rise so much that no buyers at all can be found. Then we get a crash.

    Unique artworks, because of their uniqueness, are sold in regular auctions. The high demand usually results in a high sale price. The method does an excellent job of determining who places the most value on the piece and satisfying that person, while also satisfying the seller’s desire to make the greatest possible profit. It’s great for the seller, obviously, unless he discovers at auction that in fact he places the most value on the item, and nobody is prepared to pay as much for it as he did originally.

    In theory, we should be using the regular auction model to sell houses whenever demand is higher than supply, but because a seller’s first priority is usually to recoup his own mortgage costs, his ‘low’ quoted price wouldn’t really be low at all. Add in the fact that he probably also wants to make a profit on the sale, and we’re suddenly back to the Dutch model, wherein buyers try to offer some amount in between the listed profit-price and whatever they suspect is the break-even minimum price.

    In essence, how you sell an item depends on how much you think other people want it. If you think it’s in high demand, go for regular auction to get the best price. If you think demand is low, go for the Dutch auction to get the best price. And if you think neither model will earn you a sufficient profit, you shouldn’t have bought the thing in the first place.

    I could be talking bollocks, though. Did you ask about this before? I’m having deja vu…

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