History
Auctions have a long history, having been recorded as early as 500 B.C. According to Herodotus, in Babylon auctions of women for marriage were held annually.
During the Roman Empire, following military victory, Roman soldiers would often drive a spear into the ground around which the spoils of war were left, to be auctioned off. Later slaves, often captured as the "spoils of war", were auctioned in the forum under the sign of the spear, with the proceeds of sale going towards the war effort.
One of the most significant historical auctions occurred in the year 193 A.D. when the entire Roman Empire was put on the auction block by the Praetorian Guard. On March 23 The Praetorian Guard first killed emperor Pertinax, then offered the empire to the highest bidder. Didius Julianus outbid everyone else for the price of 6,250 drachmas per Guard, an act that initiated a brief civil war. Didius was then beheaded two months later when Septimius Severus conquered Rome.
From the end of the Roman Empire to the eighteenth century auctions lost favor in Europe, while they had never been widespread in Asia.
In some parts of England during the seventeenth and eighteenth centuries auction by candle was used for the sale of goods and leaseholds. This auction began by lighting a candle after which bids were offered in ascending order until the candle spluttered out. The high bid at the time the candle extinguished itself won the auction.
The oldest auction house in the world is Stockholm Auction House (Stockholms Auktionsverk). It was established in Sweden in 1674.
During the end of the 18th century, soon after the French Revolution, auctions came to be held in taverns and coffeehouses to sell art. Such auctions were held daily, and catalogs were printed to announce available items. Such Auction catalogs were frequently printed and distributed before auctions of rare or collectible items. In some cases these catalogs were elaborate works of art themselves, containing considerable detail about the items being auctioned.
Sotheby's, now the world's second-largest auction house, held its first auction in 1744. Christie's, now the world's largest auction house, was established around 1766. Other early auction houses that are still in operation include Dorotheum(1707), Mallams (1788), Bonhams (1793), Phillips de Pury & Company (1796), Freeman's (1805) and Lyon & Turnbull (1826).
During the American civil war goods seized by armies were sold at auction by the Colonel of the division. Thus, some of today's auctioneers in the U.S. carry the unofficial title of "colonel".
The development of the internet, however, has led to a significant rise in the use of auctions as auctioneers can solicit bids via the internet from a wide range of buyers in a much wider range of commodities than was previously practical.
In 2008, the National Auctioneers Association reported that the gross revenue of the auction industry for that year was approximately $268.4 billion, with the fastest growing sectors being agricultural, machinery, and equipment auctions and residential real estate auctions.
Types
- Primary
Dutch auction also known as an open descending price auction. In the traditional Dutch auction the auctioneer begins with a high asking price which is lowered until some participant is willing to accept the auctioneer's price. The winning participant pays the last announced price. The Dutch auction is named for its best known example, the Dutch tulip auctions. ("Dutch auction" is also sometimes used to describe online auctions where several identical goods are sold simultaneously to an equal number of high bidders.) In addition to cut flower sales in the Netherlands, Dutch auctions have also been used for perishable commodities such as fish and tobacco. In practice, however, the Dutch auction is not widely used.
Sealed first-price auction, also known as a first-price sealed-bid auction (FPSB). In this type of auction all bidders simultaneously submit sealed bids so that no bidder knows the bid of any other participant. The highest bidder pays the price they submitted. This type of auction is distinct from the English auction, in that bidders can only submit one bid each. Furthermore, as bidders cannot see the bids of other participants they cannot adjust their own bids accordingly. This kind of bid produces the same outcome as Dutch auction. Sealed first-price auctions are commonly used in tendering, particularly for government contracts and auctions for mining leases.
Vickrey auction, also known as a sealed-bid second-price auction. This is identical to the sealed first-price auction except that the winning bidder pays the second highest bid rather than his or her own. This is very similar to the proxy bidding system used by eBay, where the winner pays the second highest bid plus a bidding increment (e.g., 10%). Although extremely important in auction theory, in practice Vickrey auctions are rarely used.
Multi-unit auctions sell more than one identical item at the same time, rather than having separate auctions for each. This type can be further classified as a uniform price auction or a discriminatory price auction.
- Secondary
Bidding fee auction, also known as a penny auction, requires that each participant must purchase bids prior to placing them. When an auction's time expires, the last bidder wins the item and must pay a final bid price. An example of this type of auction is Madbid, Quibids or Sweepola.
Buyout auction is an auction with a set price (the 'buyout' price) that any bidder can accept at any time during the auction (allow bidders to instantly purchase at a specified price an item listed for sale through an online auction *World of War Craft and Diablo 3 had implemented this auction system), thereby immediately ending the auction and winning the item. If no bidder chooses to utilize the buyout option before the end of bidding the highest bidder wins and pays their bid. Buyout options can be either temporary or permanent. In a temporary-buyout auction the option to buy out the auction is not available after the first bid is placed. In a permanent-buyout auction the buyout option remains available throughout the entire auction until the close of bidding. The buyout price can either remain the same throughout the entire auction, or vary throughout according to rules or simply at the whim of the seller.
Combinatorial auction is any auction for the simultaneous sale of more than one item where bidders can place bids on an "all-or-nothing" basis on "packages" rather than just individual items. That is, a bidder can specify that he or she will pay for items A and B, but only if he or she gets both. In combinatorial auctions, determining the winning bidder(s) can be a complex process where even the bidder with the highest individual bid is not guaranteed to win. For example, in an auction with four items (W, X, Y and Z), if Bidder A offers $50 for items W & Y, Bidder B offers $30 for items W & X, Bidder C offers $5 for items X & Z and Bidder D offers $30 for items Y & Z, the winners will be Bidders B & D while Bidder A misses out because the combined bids of Bidders B & D is higher ($60) than for Bidders A and C ($55).
Japanese auction is a variation of the English auction. When the bidding starts no new bidders can join, and each bidder must continue to bid each round or drop out. It has similarities to the ante in Poker.
Mystery auction is a type of auction where bidders bid for boxes or envelopes containing various items, usually on the hope that the items will be humorous, interesting, or valuable. In the early days of eBay's popularity, sellers began promoting boxes or packages of random and usually low-value items not worth selling by themselves.
No-reserve auction (NR), also known as an absolute auction, is an auction in which the item for sale will be sold regardless of price. From the seller's perspective, advertising an auction as having no reserve price can be desirable because it potentially attracts a greater number of bidders due to the possibility of a bargain. If more bidders attend the auction, a higher price might ultimately be achieved because of heightened competition from bidders. This contrasts with a reserve auction, where the item for sale may not be sold if the final bid is not high enough to satisfy the seller. In practice, an auction advertised as "absolute" or "no-reserve" may nonetheless still not sell to the highest bidder on the day, for example, if the seller withdraws the item from the auction or extends the auction period indefinitely although these practices may be restricted by law in some jurisdictions or under the terms of sale available from the auctioneer.
Reserve auction is an auction where the item for sale may not be sold if the final bid is not high enough to satisfy the seller; that is, the seller reserves the right to accept or reject the highest bid. In these cases a set 'reserve' price known to the auctioneer, but not necessarily to the bidders, may have been set, below which the item may not be sold. The reserve price may be fixed or discretionary. In the latter case, the decision to accept a bid is deferred to the auctioneer, who may accept a bid that is marginally below it. A reserve auction is safer for the seller than a no-reserve auction as they are not required to accept a low bid, but this could result in a lower final price if less interest is generated in the sale.
Reverse auction is a type of auction in which the roles of the buyer and the seller are reversed, with the primary objective to drive purchase prices downward. While ordinary auctions provide suppliers the opportunity to find the best price among interested buyers, reverse auctions give buyers a chance to find the lowest-price supplier. During a reverse auction, suppliers may submit multiple offers, usually as a response to competing suppliers’ offers, bidding down the price of a good or service to the lowest price they are willing to receive. By revealing the competing bids in real time to every participating supplier, reverse auctions promote “information transparency”. This, coupled with the dynamic bidding process, improves the chances of reaching the fair market value of the item. The reverse auction is widely used by corporations, state and local Governments, and other organizations. The uses are vast and include services as well as goods.
Silent auction is a variant of the English auction in which bids are written on a sheet of paper. At the predetermined end of the auction, the highest listed bidder wins the item. This auction is often used in charity events, with many items auctioned simultaneously and "closed" at a common finish time. The auction is "silent" in that there is no auctioneer selling individual items, the bidders writing their bids on a bidding sheet often left on a table near the item. At charity auctions, bid sheets usually have a fixed starting amount, predetermined bid increments, and a "guaranteed bid" amount which works the same as a "buy now" amount. Other variations of this type of auction may include sealed bids. The highest bidder pays the price he or she submitted.
Senior auction is a variation on the all-pay auction, and has a defined loser in addition to the winner. The top two bidders must pay their full final bid amounts, and only the highest wins the auction. The intent is to make the high bidders bid above their upper limits. In the final rounds of bidding, when the current losing party has hit their maximum bid, they are encouraged to bid over their maximum (seen as a small loss) to avoid losing their maximum bid with no return (a very large loss).
Top-Up auction is a variation on the all-pay auction, primarily used for charity events. Bidders must pay the difference between their bid and the next lowest bid, whether they win or not. Only the winning bidder does not have to pay the "top-up" fee, but does have to pay for the item.
Walrasian auction or Walrasian tâtonnement is an auction in which the auctioneer takes bids from both buyers and sellers in a market of multiple goods. The auctioneer progressively either raises or drops the current proposed price depending on the bids of both buyers and sellers, the auction concluding when supply and demand exactly balance. As a high price tends to dampen demand while a low price tends to increase demand, in theory there is a particular price somewhere in the middle where supply and demand will match.
Auction by the candle. A type of auction, used in England for selling ships, in which the highest bid laid on the table when a guttering candle expires wins.
Time requirements
Each type of auction has its specific qualities such as pricing accuracy and time required for preparing and conducting the auction. The number of simultaneous bidders is of critical importance. Open bidding during an extended period of time with many bidders will result in a final bid that is very close to the true market value. Where there are few bidders and each bidder is allowed only one bid, time is saved, but the winning bid may not reflect the true market value with any degree of accuracy. Of special interest and importance during the actual auction is the time elapsed from the moment that the first bid is revealed to the moment that the final (winning) bid has become a binding agreement.
Characteristics
Auctions can differ in the number of participants:
In a supply (or reverse) auction, m sellers offer a good that a buyer requests
In a demand auction, n buyers bid for a good being sold
In a double auction, n buyers bid to buy goods from m sellers
Auctions are publicly and privately seen in several contexts and almost anything can be sold at auction. Some typical auction arenas include the following:
* The antique business, where besides being an opportunity for trade they also serve as social occasions and entertainment
* In the sale of collectibles such as stamps, coins, classic cars, fine art and luxury real estate
* The wine auction business, where serious collectors can gain access to rare bottles and mature vintages, not typically available through retail channels
* In the sale of all types of real property including residential and commercial real estate, farms, vacant lots and land.
* For the sale of consumer second-hand goods of all kinds, particularly farm (equipment) and house clearances and online auctions.
* Sale of industrial machinery, both surplus or through insolvency.
* In commodities auctions, like the fish wholesale auctions
* In livestock auctions where sheep, cattle, pigs and other livestock are sold. Sometimes very large numbers of stock are auctioned, such as the regular sales of 50,000 or more sheep during a day in New South Wales.
*In wool auctions where international agents purchase lots of wool
* Thoroughbred horses, where yearling horses and other bloodstock are auctioned.
* In legal contexts where forced auctions occur, as when one's farm or house is sold at auction on the courthouse steps.
* Travel tickets. One example is SJ AB in Sweden auctioning surplus at Tradera (Swedish eBay).
* Holidays. A variety of holidays are available for sale online particularly via eBay. Vacation rentals appear to be most common. Many holiday auction websites have launched but failed.
* Self storage units. In certain jurisdictions, if a storage facility's tenant fails to pay his/her rent, the contents of his/her locker(s) may be sold at a public auction. Several television shows focus on such auctions, including Storage Wars and Auction Hunters.
Although less publicly visible, the most economically important auctions are the commodities auctions in which the bidders are businesses even up to corporation level. Examples of this type of auction include:
Although less publicly visible, the most economically important auctions are the commodities auctions in which the bidders are businesses even up to corporation level. Examples of this type of auction include:
* Sales of businesses
* Spectrum auctions, in which companies purchase licenses to use portions of the electromagnetic spectrum for communications (e.g., mobile phone networks)
* Private electronic markets using combinatorial auction techniques to continuously sell commodities (coal, iron ore, grain, water...) to a pre-qualified group of buyers (based on price and non-price factors)
* Timber auctions, in which companies purchase licenses to log on government land
* Timber allocation auctions, in which companies purchase timber directly from the government Forest Auctions
* Electricity auctions, in which large-scale generators and consumers of electricity bid on generating contracts
* Environmental auctions, in which companies bid for licenses to avoid being required to decrease their environmental impact. These include auctions in emissions trading schemes.
* Debt auctions, in which governments sell debt instruments, such as bonds, to investors. The auction is usually sealed and the uniform price paid by the investors is typically the best non-winning bid. In most cases, investors can also place so called non-competitive bids, which indicates an interest to purchase the debt instrument at the resulting price, whatever it may be.
* Auto auctions, in which car dealers purchase used vehicles to retail to the public.
Bidding strategy
Bid shading is placing a bid which is below the bidder's actual value for the item. Such a strategy risks losing the auction, but has the possibility of winning at a low price. Bid shading can also be a strategy to avoid the Winner's curse.
Bidding strategy
Bid shading is placing a bid which is below the bidder's actual value for the item. Such a strategy risks losing the auction, but has the possibility of winning at a low price. Bid shading can also be a strategy to avoid the Winner's curse.
Chandelier or Rafter Bidding
A practice, especially by high-end art auctioneers, of raising false bids at crucial times in the bidding process in order to create the appearance of greater demand or to extend bidding momentum for a work on offer. To call out these nonexistent bids, auctioneers might fix their gaze at a point in the auction room that is difficult for the audience to pin down.
In the United Kingdom, this practice is legal on property auctions up to but not including the reserve price, and is also known as off-the-wall bidding.
Collusion
Whenever bidders at an auction are aware of the identity of the other bidders there is a risk that they will form a "ring" and thus manipulate the auction result, a practice known as collusion. By agreeing to bid only against outsiders, never against members of the "ring", competition becomes weaker, which may dramatically affect the final price level. After the end of the official auction an unofficial auction may take place among the "ring" members. The difference in price between the two auctions could then be split among the members. This form of a ring was used as a central plot device in the opening episode of the 1979 British Television Series The House of Caradus, For Love or Money, uncovered by Helena Caradus on her return from Paris.
A ring can also be used to increase the price of an auction lot, in which the owner of the object being auctioned may increase competition by taking part in the bidding him or herself, but drop out of the bidding just before the final bid. In Britain and many other countries, rings and other forms of bidding on one's own object are illegal. This form of a ring was used as a central plot device in an episode of the British television series Lovejoy (series 4, episode 3) in which the price of a watercolour by the (fictional) Jessie Webb is inflated so that others by the same artist could be sold for more than their purchase price.
In an English auction a dummy bid is a bid made by a dummy bidder acting in collusion with the auctioneer or vendor, designed to deceive genuine bidders into paying more. In a First price auction a dummy bid is an unfavourable bid designed so as not to become the winning bid. (The bidder does not want to win this auction, but he or she wants to make sure to be invited to the next auction).
In Australia a dummy bid (shill, schill) is a criminal offence but a vendor bid or a co-owner bid below the reserve price is permitted, if clearly declared as such by the auctioneer. These are all official legal terms in Australia, but may have other meanings elsewhere. A co-owner is one of two or several owners (who disagree among themselves).
In Sweden and many other countries there are no legal restrictions, but it will severely hurt the reputation of an auction house that knowingly permits any other bids except genuine bids. If the reserve is not reached this should be clearly declared.
Suggested opening bid (SOB)
There will usually be an estimate of what price the lot will fetch. In an ascending open auction it is considered important to get at least a 50-percent increase in the bids from start to finish. To accomplish this, the auctioneer must start the auction by announcing a suggested opening bid (SOB) that is low enough to be immediately accepted by one of the bidders. Once there is an opening bid, there will quickly be several other, higher bids submitted. Experienced auctioneers will often select an SOB that is about 45 percent of the (lowest) estimate. Thus there is a certain margin of safety to ensure that there will indeed be a lively auction with many bids submitted. Several observations indicate that the lower the SOB, the higher the final winning bid. This is due to the increase in the number of bidders attracted by the low SOB.
A chi-squared distribution shows many low bids but few high bids. Bids "show up together"; without several low bids there will not be any high bids.
Another approach to choosing an SOB: The auctioneer may achieve good success by asking the expected final sales price for the item, as this method suggests to the potential buyers the item's particular value. For instance, say an auctioneer is about to sell a $1,000 car at a sale. Instead of asking $100, hoping to entice wide interest (for who wouldn't want a $1,000 car for $100?), the auctioneer may suggest an opening bid of $1,000; although the first bidder may begin bidding at a mere $100, the final bid may more likely approach $1,000.
Terminology
- Appraisal - An estimate of an item's worth, usually performed by an expert in that particular field
- Auction block - A platform from which an auctioneer sells; "they put their paintings on the block"
- Bidding
- Buyer's premium - A fee paid by the buyer to the auction house; typically calculated as a percentage of the winning bid and added on to it.
- Buyout price - A price that, if accepted by a bidder, immediately ends the auction and awards the item to him/her.
- Commission - A fee collected by the auction house; typically calculated as a percentage of the winning bid and subtracted from it before the money is released to the seller.
- Consignee - Shipper
- Consignor - Receiver
- Dummy bid
- CMD (Caution Money Deposit)
- Dynamic closing - If a bid is placed on a lot and there are less then 2 minutes until the auction expires, the auction will automatically be extended so that it expires 2 minutes after the bid. In this way we ensure that everyone who wishes to bid has the opportunity to do so. There will always be at least 2 minutes in which to overbid. If in this period of time another bid is placed on the lot, the auction is extended again.
- EMD (Earnest Money Deposit) - A payment that must be made by prospective bidders ahead of time to indicate that they are serious about wanting to buy an item. Most often used when high-value goods such as real estate are up for auction. The winning bidder has his/her earnest money applied toward the final selling price; the non-winners have theirs refunded to them.
- Escrow - An arrangement in which the winning bidder pays the amount of his/her bid to a third party, who in turn releases the funds to the seller under agreed-upon terms.
- Hammer price - Nominal price at which a lot is sold; the buyer is responsible for paying any additional fees and taxes on top of this amount.
- Increment - The minimum amount by which a new bid must exceed the previous one.
- Job lot - A large quantity of identical manufactured goods being sold as a single item.
- Lot - A single item or group of items that are bid on as one unit.
- Minimum bid - The smallest opening bid that will be accepted.
- No reserve - An auction in which the seller must honor the winning bid, regardless of its amount.
- Outbid - To bid higher than another person.
- Opening bid - First bid placed on a particular lot.
- Proxy bid (aka absentee bid) - A bid placed by an authorized representative of a bidder who is not physically present at the auction. If the proxy is outbid, he/she may increase the bid in increments up to a pre-arranged maximum.
- Registration deposit
- Relisting - This is to put an item up for bid again, after its first auction didn't attract any bids, or its reserve price was not met
- Reserve price - A minimum acceptable price that is established by the seller prior to the auction; may or may not be disclosed to the bidders. If the winning bid is below the reserve price, the seller has the right to withdraw the lot.
- Sniping - Placing a bid just before the end of a timed auction, thus giving other bidders no time to enter new bids.
- Vendor - The seller
- Vendor bid - A type of bid at an auction which is made by the auctioneer on behalf of the vendor. This is used as a tactic to keep the bids moving, or to persuade buyers to pay more, or merely to have a higher price to report if the property is passed in.
An online auction is an auction which is held over the internet. Online auctions come in many different formats, but most popularly they are ascending English auctions, descending Dutch auctions, first-price sealed-bid, Vickrey auctions, or sometimes even a combination of multiple auctions, taking elements of one and forging them with another. The scope and reach of these auctions have been propelled by the Internet to a level beyond what the initial purveyors had anticipated. This is mainly because online auctions break down and remove the physical limitations of traditional auctions such as geography, presence, time, space, and a small target audience. This influx in reachability has also made it easier to commit unlawful actions within an auction. In 2002, online auctions were projected to account for 30% of all online e-commerce due to the rapid expansion of the popularity of the form of electronic commerce.
History
Online auctions were taking place even before the release of the first web browser for personal computers, NCSA Mosaic. Instead of users selling items through the Web they were instead trading through text-based newsgroups and email discussion lists. However, the first Web-based commercial activity regarding online auctions that made significant sales began in May 1995 with the company Onsale. In September that same year eBay also began trading. Both of these companies used ascending bid, English auctions and were the first of their kind to take advantage of the new technological opportunities. The Web offered new advantages such as the use of automated bids via electronic forms, a search engine to be able to quickly find items and the ability to allow users to view items by categories.
Online auctions have greatly increased the variety of goods and services that can be bought and sold using auction mechanisms along with expanding the possibilities for the ways auctions can be conducted and in general created new uses for auctions. In the current web environment there are hundreds, if not thousands, of websites dedicated to online auction practices.
Legalities
- Shill Bidding - Placing fake bids that benefits the seller of the item is known as Shill Bidding. This is a method often used in Online auctions but can also happen in standard Auctions. This is seen as an unlawful act as it unfairly raises the final price of the auction, so that the winning bidder pays more than they should have. If the shill bid is unsuccessful, the item owner needs to pay the auction fees. In 2011, a member of eBay became the first individual to be convicted of shill bidding on an auction. By taking part in the process, an individual is breaking the European Union fair trading rules which carries out a fine of up to £5,000 in the United Kingdom.
- Fraud - The increasing popularity of using online auctions has led to an increase in fraudulent activity. This is usually performed on an auction website by creating a very appetising auction, such as a low starting amount. Once a buyer wins an auction and pays for it, the fradulent seller will either not pursue with the delivery, or send a less valuable version of the purchased item (replicated, used, refurbished, etc.). Protection to prevent such acts has become readily available, most notably Paypal's buyer protection policy. As Paypal handles the transaction, they have the ability to hold funds until a conclusion is drawn whereby the victim can be compensated.
- Sale of Stolen Goods - Online auction websites are used by thieves or fences to sell stolen goods to unsuspecting buyers. According to police statistics there were over 8000 crimes involving stolen goods, fraud or deception reported on eBay in 2009. It has become common practice for organised criminals to steal in-demand items, often in bulk. These items are then sold online as it is a safer option due to the anonymity and worldwide market it provides. Auction fraud makes up a large percentage of complaints received by the FBI’s Internet Crime Complaint Center (IC3). This was around 45% in 2006 and 63% in 2005.
Auction sniping is a controversial bidding technique used in timed online auctions. It is the practice of placing a bid in the final stages of an auction with the aim of removing other bidder's ability to place another bid before the auction ends. These bids can either be placed by the bidder manually or automatically with the use of a tool. There are tools available that have been developed for this purpose. However, the use of these tools is the subject of much controversy.
- Online: These are hosted on a remote server and are a service run by a third party.
- Local: This type is a script which can downloaded onto the users computer which is then activated and run locally.
How it works
Participants pay a non-refundable fee to purchase bids. Each of the bids increases the price of the item by a small amount, such as 0.01 USD (1¢) or 0.01 GBP (1p), and extends the time of the auction by a few seconds. Bid prices vary by site and quantity purchased at a time, but generally cost 10–150 times the price of the bidding increment. Once the auction is over, the auctioneer collects the final cost of the item in addition to the money already collected by selling bids. A TechCrunch article on MadBid, one such site, called this model "a license to print money." Other examples of bidding fee auction sites include Beezid, Ziinga, DealDash, and PisoBid.
For example, if an item worth $1,000 sells at a final price of $60, and a bid costing $1 raises the price of the item by $0.01, the auctioneer receives $6,000 for the 6,000 bids and $60 as the final price, a total of $6,060. This represents a profit of $5,060 for the auction site. Assuming the winning bidder used 150 bids in the process, they would have paid $150 for the bids and $60 for the final price, a total of $210 and a savings of $790. It must be noted that had they not won the auction they would still be out $150 for the bids without receiving the item.
Criticism
Due to the possibility of participants spending a lot of money and still losing an auction, or spending more than the retail value of the item they end up winning, some analysts have criticized the model or compared it to gambling. The Better Business Bureau warns consumers, "although not all penny auction sites are scams, some are being investigated as online gambling. BBB recommends you... know exactly how the bidding works, set a limit for yourself, and be prepared to walk away before you go over that limit."
Some bidding fee auction sites have been shut down by state governments after investigations. Wavee US, LLC, settled with the Governor's Office of Consumer Protection in Georgia and agreed to close its web site after the office received complaints about merchandise not being shipped in a timely fashion. Washington state shut down PennyBiddr after a lawsuit in which the state accused PennyBiddr of using shill bidding to drive up prices and extend auctions, a claim originally made by members of the penny auction community. In addition, several auction sites which claimed to be Better Business Bureau"Accredited" were not members of the BBB or had poor ratings with the BBB.
Some Craigslist users have fallen victim to scams where a "seller" of an item on Craigslist refers would-be buyers to sign up for a bidding fee auction site. These sites then charge customers an up-front fee for a pack of bids and pay a commission to the scammer who referred a new customer to the site. The CEO of one site implicated in an MSNBC investigation blamed this behavior on rogue affiliate marketers.
Due to the possibility of participants spending a lot of money and still losing an auction, or spending more than the retail value of the item they end up winning, some analysts have criticized the model or compared it to gambling. The Better Business Bureau warns consumers, "although not all penny auction sites are scams, some are being investigated as online gambling. BBB recommends you... know exactly how the bidding works, set a limit for yourself, and be prepared to walk away before you go over that limit."
Some bidding fee auction sites have been shut down by state governments after investigations. Wavee US, LLC, settled with the Governor's Office of Consumer Protection in Georgia and agreed to close its web site after the office received complaints about merchandise not being shipped in a timely fashion. Washington state shut down PennyBiddr after a lawsuit in which the state accused PennyBiddr of using shill bidding to drive up prices and extend auctions, a claim originally made by members of the penny auction community. In addition, several auction sites which claimed to be Better Business Bureau"Accredited" were not members of the BBB or had poor ratings with the BBB.
Some Craigslist users have fallen victim to scams where a "seller" of an item on Craigslist refers would-be buyers to sign up for a bidding fee auction site. These sites then charge customers an up-front fee for a pack of bids and pay a commission to the scammer who referred a new customer to the site. The CEO of one site implicated in an MSNBC investigation blamed this behavior on rogue affiliate marketers.
A unique bid auction is a type of strategy game related to traditional auctions where the winner is usually the individual with the lowest unique bid, although less commonly the auction rules may specify that the highest unique bid is the winner. Unique bid auctions are often used as a form of competition and strategy game where bidders pay a fee to make a bid, or may have to pay a subscription fee in order to be able to participate.
Mechanism
This type of auction requires bidders to place bids that are global unique bids. That is, for a bid to be eligible to win no other bidder can have made a bid for the same amount. Bidders are generally able to place multiple bids and the number of current bids at each amount is typically kept secret.
There are two major variants of unique bid auctions:
1. In a highest unique bid auction, the bid that is the highest and unmatched when the auction closes is the winning bid. A maximum bid value is usually set at a much lower level than the actual value of the lot.
2. In a lowest unique bid auction, the bid that is the lowest and unmatched when the auction closes is the winning bid.
Unique bid auctions will typically allow bids to be very precise, in that each bid can be specific to the 'penny'.
For example, a unique bid auction might run as follows:
In a lowest unique bid auction, the bidder who submitted the single bid of $0.06 would win the auction, and would be eligible to purchase the product or service for $0.06, because their bid was the lowest unique bid. In a highest unique bid auction, the bidder who submitted a bid of $0.09 would win the auction.
In this type of auction the bids of other participants are necessarily secret, although some companies may provide broad guidance following a bid, such as whether the winning unique bid is higher or lower than one's last bid. In some instances the players may receive enough information for the game to be considered one of strategy. In other cases the guidance provided may be of little or no strategic value and the game may be considered one of chance.
This type of auction requires bidders to place bids that are global unique bids. That is, for a bid to be eligible to win no other bidder can have made a bid for the same amount. Bidders are generally able to place multiple bids and the number of current bids at each amount is typically kept secret.
There are two major variants of unique bid auctions:
1. In a highest unique bid auction, the bid that is the highest and unmatched when the auction closes is the winning bid. A maximum bid value is usually set at a much lower level than the actual value of the lot.
2. In a lowest unique bid auction, the bid that is the lowest and unmatched when the auction closes is the winning bid.
Unique bid auctions will typically allow bids to be very precise, in that each bid can be specific to the 'penny'.
For example, a unique bid auction might run as follows:
Value Number of bids Comment $0.01 34 $0.02 9 $0.03 17 $0.04 57 $0.05 35 $0.06 1 Lowest unique bid $0.07 17 $0.08 0 $0.09 1 Highest unique bid $0.10 2
In a lowest unique bid auction, the bidder who submitted the single bid of $0.06 would win the auction, and would be eligible to purchase the product or service for $0.06, because their bid was the lowest unique bid. In a highest unique bid auction, the bidder who submitted a bid of $0.09 would win the auction.
In this type of auction the bids of other participants are necessarily secret, although some companies may provide broad guidance following a bid, such as whether the winning unique bid is higher or lower than one's last bid. In some instances the players may receive enough information for the game to be considered one of strategy. In other cases the guidance provided may be of little or no strategic value and the game may be considered one of chance.
Profitability of unique bid auctions
Although items worth thousands of dollars can, under some circumstances, be won by very low bids of far less than their value, the auction organizer typically charges a participation fee, which in an auction with a sufficiently large number of bidders will exceed the value of the item being sold, allowing the auction organizer to make a profit.
Because such auctions typically require very large numbers of bidders to be profitable, virtually all instances of unique bid auctions are heavily dependent on the use of technology, in that they are either run solely using mobile technology (e.g. bidders submit their bids via reverse charge text messages) or they are on-line auction sites, or both.
Legality
The legality of unique bid auctions depends on a combination of governing gambling laws and the design of the specific auction model. If an investigating authority were to determine that randomness or chance plays too large a role in the outcome, the auction may be considered a type of lottery. If, on the other hand, the investigating authority found strategy and skill played a sufficient enough role in the outcome, they may find the auction to be legal. Worldwide, there are no reported cases or statutes specifically outlawing the lowest-unique bid auction model.
The definition of a lottery differs among jurisdictions and is to be judged in a case by case manner. An English case held that "there will seemingly be never any finality on the question what is a lottery" because “attempts to do so may indeed be counter-productive, since each added precision merely provides an incentive to devise a variant which eludes it”. Legislatures tend to leave the definition open in order to encompass lotteries that were not envisaged at the time of the enactment of the legislation.
Under English common law, a lottery includes any game, method, device, scheme or competition whereby money or money’s worth is distributed or allotted in any manner depending upon or to be determined by chance or lot, whether the same is held, drawn, exercised or managed within or without the jurisdiction.
Although items worth thousands of dollars can, under some circumstances, be won by very low bids of far less than their value, the auction organizer typically charges a participation fee, which in an auction with a sufficiently large number of bidders will exceed the value of the item being sold, allowing the auction organizer to make a profit.
Because such auctions typically require very large numbers of bidders to be profitable, virtually all instances of unique bid auctions are heavily dependent on the use of technology, in that they are either run solely using mobile technology (e.g. bidders submit their bids via reverse charge text messages) or they are on-line auction sites, or both.
Legality
The legality of unique bid auctions depends on a combination of governing gambling laws and the design of the specific auction model. If an investigating authority were to determine that randomness or chance plays too large a role in the outcome, the auction may be considered a type of lottery. If, on the other hand, the investigating authority found strategy and skill played a sufficient enough role in the outcome, they may find the auction to be legal. Worldwide, there are no reported cases or statutes specifically outlawing the lowest-unique bid auction model.
The definition of a lottery differs among jurisdictions and is to be judged in a case by case manner. An English case held that "there will seemingly be never any finality on the question what is a lottery" because “attempts to do so may indeed be counter-productive, since each added precision merely provides an incentive to devise a variant which eludes it”. Legislatures tend to leave the definition open in order to encompass lotteries that were not envisaged at the time of the enactment of the legislation.
Under English common law, a lottery includes any game, method, device, scheme or competition whereby money or money’s worth is distributed or allotted in any manner depending upon or to be determined by chance or lot, whether the same is held, drawn, exercised or managed within or without the jurisdiction.
A business model is therefore a lottery if participants are required to:-(a) pay a non-refundable fee of money or money in kind, in (b) a scheme of lot or chance, to (c) receive a reward of some kind,
Depending on a combination of governing gambling laws and the design of the specific auction, unique bid auctions may satisfy the above criteria.
Depending on a combination of governing gambling laws and the design of the specific auction, unique bid auctions may satisfy the above criteria.
(a) Paying a non-refundable fee
Unique bid auction companies typically avoid calling the payment by the bidder an outright fee for the chance of winning an item, applying synonyms to elude the purpose of raising revenue from a collective pool of bidders that covers the cost of the auction item.
Some businesses forego refunding the fee paid and provide something else in kind to distance themselves from being a lottery. In the New Zealand case Department of Internal Affairs v Hayes [2007], customers offered bids costing 99 cents for the chance to win a Peugot car. The company offered Pizza Hut discount coupons to the bidders. Although customers received an item of value, the bids were sent for the purpose of winning a car, and the refund was not identical to what had been offered, and was held to be a lottery.
Other auction models offer rewards points, discounts and other bonuses.
If no fee of any kind is required to bid, as with traditional auction models like ebay, the scheme is not a lottery because participants are not losing money or kind.
(b) Chance
Chance means that the result be uncertain, indefinite or doubtful.
Although the role of chance makes a scheme a lottery, unique bid auctions may avoid lottery classification if chance plays only an incidental role when skill is the overriding factor. The legal question becomes whether "chance predominates and is the one outstanding feature". "The exercise of any skill, greater than a mere scintilla, which, looking at the scheme as a whole, has contributed to the successful result, will be sufficient to take the case out of the (English) Act." An example where a scheme was permitted to run despite the role of chance was when the individual "used his knowledge and experience of the football world in choosing the pools to be entered into and the method of completing them". It should be noted that sports wagering is legal in only a few US locales that typically also allow other forms of gambling - Las Vegas for instance. Gambling laws, which are predominately written at the State level, continue to evolve in the US. The degree to which 'chance', 'randomness' or 'luck' factors into the determination of legality varies significantly between the states and around the world.
A distinguishing difference between unique bid auctions and traditional lotteries, games of chance, and sporting events (gambling) is the absence of an external randomizing device. All cards games, lotteries, raffles and mechanical games typically found in casinos utilize an exogenous device to introduce chance into the game. In card games it is the deck of cards. Lotteries use randomly selected numbers while raffles rely on randomly selected tickets or markers to select the winner. Table games in casinos use dice. In sporting events, the participants in the competition (football players for instance) represent the element of chance since their behavior is outside the control of those wagering on the outcome. In a unique bid auction, there is no external device that introduces chance or randomness. The outcome of the auction, while not controlled exclusively by one player, is controlled exclusively by the collective group of players wagering on the outcome. And only those participating in the game can wager on the outcome.
Chance means that the result be uncertain, indefinite or doubtful.
Although the role of chance makes a scheme a lottery, unique bid auctions may avoid lottery classification if chance plays only an incidental role when skill is the overriding factor. The legal question becomes whether "chance predominates and is the one outstanding feature". "The exercise of any skill, greater than a mere scintilla, which, looking at the scheme as a whole, has contributed to the successful result, will be sufficient to take the case out of the (English) Act." An example where a scheme was permitted to run despite the role of chance was when the individual "used his knowledge and experience of the football world in choosing the pools to be entered into and the method of completing them". It should be noted that sports wagering is legal in only a few US locales that typically also allow other forms of gambling - Las Vegas for instance. Gambling laws, which are predominately written at the State level, continue to evolve in the US. The degree to which 'chance', 'randomness' or 'luck' factors into the determination of legality varies significantly between the states and around the world.
A distinguishing difference between unique bid auctions and traditional lotteries, games of chance, and sporting events (gambling) is the absence of an external randomizing device. All cards games, lotteries, raffles and mechanical games typically found in casinos utilize an exogenous device to introduce chance into the game. In card games it is the deck of cards. Lotteries use randomly selected numbers while raffles rely on randomly selected tickets or markers to select the winner. Table games in casinos use dice. In sporting events, the participants in the competition (football players for instance) represent the element of chance since their behavior is outside the control of those wagering on the outcome. In a unique bid auction, there is no external device that introduces chance or randomness. The outcome of the auction, while not controlled exclusively by one player, is controlled exclusively by the collective group of players wagering on the outcome. And only those participating in the game can wager on the outcome.
(c) Receiving a reward of some kind
The unique bid auction model's attractiveness is the possibility of obtaining an item at significantly lower cost than the retail price.
Mathematical analysis
The theory of unique bid auctions has been the subject of mathematical investigation. In a 2007 paper Bruss, Louchard and Ward proposed a technique for calculating game-theoretic probabilistic optimal strategies for unique bid auctions, given a small set of extra assumptions about the nature of the auction.Another paper by Raviv and Gabor in the same year made theoretical predictions and compared their results to the results of real-world unique bid auctions. Another paper by Rapoport et. al. compared theoretical results to the results of experimental auctions.
Further work by Bruss et al. and a number of other researchers including Gallice, and Rapoport and Otsubo has continued to develop the theory on this subject.
In a 2012 study Pigolotti et.al. conducted a thorough study of the unique bid auction in the grand canonical ensemble, finding a theoretical expression for the Nash equilibrium distribution and showing that real-world players play according to this distribution when the number of players in the auction is low.
The theory of unique bid auctions has been the subject of mathematical investigation. In a 2007 paper Bruss, Louchard and Ward proposed a technique for calculating game-theoretic probabilistic optimal strategies for unique bid auctions, given a small set of extra assumptions about the nature of the auction.Another paper by Raviv and Gabor in the same year made theoretical predictions and compared their results to the results of real-world unique bid auctions. Another paper by Rapoport et. al. compared theoretical results to the results of experimental auctions.
Further work by Bruss et al. and a number of other researchers including Gallice, and Rapoport and Otsubo has continued to develop the theory on this subject.
In a 2012 study Pigolotti et.al. conducted a thorough study of the unique bid auction in the grand canonical ensemble, finding a theoretical expression for the Nash equilibrium distribution and showing that real-world players play according to this distribution when the number of players in the auction is low.
