What is an English Auction?

Explanation

English auction is the process under which one quantity of a product is listed for sale. Under this method, all the bidders are aware of each other, and the bids are placed openly in front of everyone. The process starts with the declaration of the opening bid or the reserve priceReserve PriceReserve price refers to the minimum price at which the seller of an item is ready to sell its item in an auction, below which he is not obliged to accept the deal.read more, which the product seller sets. After this, the interested bidders start placing their respective bids in an ascending order, i.e., the next bid should be higher than the previous bidder’s price. This process continues until there is a bid above which any other buyer is not interested in buying the item. It is the highest bid and the selling price of the product.

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Features

  • English auction is an open and transparent auction with different bidders, and each bidder’s value is known to others.All the bids should be in ascending order, and the next bidder can place the bid with an amount higher than the previous bid amount.The seller of the product sets the reserve price or the opening bid. So, the bid below such price is allowed.The auction houses set the mechanism of the bid priceBid PriceBid Price is the highest amount that a buyer quotes against the “ask price” (quoted by a seller) to buy particular security, stock, or any financial instrument. read more increment.

Example of English Auction

Mr. A defaulted on the loan taken from the bank. On his inability to repay the loan, the bank decided to sell off the security attached to the loan, i.e., Mr. A’s house. So, the bank decided to recover the loan by selling the house through the bidding process. Bank arranged the auction and advertised the auction so that many bidders could come and bid. The bank’s initial price was $ 250,000, which was the current market value of the house prevailing at the time of auction.

The bidding process started by the host of the bid program declared the initial set price as $ 250,000 to all the bidders at the auction and asked them to bid further. One of the bidders placed the bid at $ 265,000, and further bid increased to $ 275,000 and then to $ 300,000. After which, no further bid was received. So, the house was sold to the person who bidded for $ 300,000, and with this, the host announced the completion of the auction. It is an example of an English auction.

Variations

  • First Variation in an English clock auction where the auction completes in a single day only by arranging the bidding and inviting the bidders to the auction place. In this type of auction, the bid starts with the lower amount and completes at the higher amount, and in the end, the winner is announced, and the host announces the completion of the bid.The other type of English auction is time interval auction, which is not completed in a single day, and it takes a few days to complete the auction. The auction may be in physical form or online form. The bidders are given the time frame within which the bid is to be submitted, and then the host will announce the winner, who is the highest bidder. An example is tendered, contract bidding, government bidding, etc.

English Auction Bidding Strategy

  • Price Step Bidding – In the price step bidding, the bidding starts with the lower amount, and slowly and gradually, it increases without any big gap between the two biddings.Higher Price or Lighthouse Bidding – In this type of bidding, the bidding starts with the lower amount, and suddenly the buyer bids for the much higher amount and the small bidders get eliminated.Bid Cutting – In bid cutting, the bid starts as normal, and the same gets increased mistakenly by one of the bidders. After that, the bidder wants to correct the bid, so he asks to forbid cutting and bid higher than the previous bid value. Only the bidder can cut the bidding if the host permits him to do so.Bidding by Head Actions – If the bidder nods the head, it is considered he is still in bidding, and if he shakes his head, it means he declares by his actions that he can’t bid further.

English Auction vs. Dutch Auction

  • English auction is a type of auction where the bid starts from the lower value and reaches the highest value. In contrast, in a Dutch auction, the bidding starts from the highest value and reaches the lower value but not less than the minimum amount set.One can bid from minimum to maximum in English bidding, whereas in Dutch bidding, one can bid from maximum to minimum.The highest price is not set in an English auction, whereas the Dutch auction is the highest price.

Drawbacks

  • Arrangement of bidding involves a high cost.It leads to undue gain to the auctioneer if there are aggressive bidders.Eliminates the small bidders.No maximum price is set. The bidder can bid at any highest price.Legal regulations and formalities are more.

This has been a guide to What is English Auction & its Meaning. Here we discuss its features and valuations along with examples and drawbacks. You can learn more about them from the following articles –

  • Vickrey AuctionAuction MarketReverse AuctionSellers Market