Introduction to Auctions

Published by Mario Oettler on

Auctions play a vital role in our everyday life. We find them in online marketplaces, advertisement, power and gas trading, arts, flowers, issuance of central bank money, stock exchanges, etc.

Auctions are also part of blockchains fee structure. They can also be used to sell tokens in an ICO or trade NFTs.

In this topic, we learn basic auction mechanisms.

What are Auctions Good For?

Using an auction can have different objectives. The most prominent one is to find out the best price for a service or good.

Auctions can have two perspectives:

  1. Selling an item
  2. Buying an item

If we want to sell an item, the auctioneer looks for the highest price. He hopes that the participants outbid each other driving the price up.

If we want to buy something, the auctioneer tries to find the lowest price. He hopes that the participants underbid each other driving the price down.

Types of Auctions

There are many design possibilities of auctions. Here are the most common ones:

  • The bid is open or sealed (closed)
  • The bids increase or decrease
  • The final price is the highest bid or second-highest bid
  • The bidder increases bid or auctioneer increases bid
  • End of auction: Nobody wants to bid anymore or time elapsed

Phases of Auctions

Typically, auctions have three phases:

  1. Information retrieval: Participants learn about the item and make a decision on how much it is worth to them.
  2. Bidding: This is the process where participants bid.
  3. Settlement: The winning bidder pays the money and receives the item.