Subject:
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The four types of markets (was Re: Reverse (buyer's) auction for train windows and other parts
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Newsgroups:
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lugnet.market.auction
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Date:
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Wed, 4 Aug 1999 00:40:49 GMT
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Viewed:
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892 times
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Well, I have to say that your use of the term "reverse auction" is a bit
confusing. Normally, "reverse auction" refers to Dutch or descending-price
auctions in which all bids come from buyers (and the bid *falls* over time),
not auctions in which there are known buyers and no sellers.
Just in case anyone's still interested, here are the gory details:
In a reverse auction the buyers are committed (they *must* conduct a
transaction) and the sellers are uncommitted (they'll conduct the transaction
only if there's a good price). In a standard auction, it's the sellers who are
committed and the buyers who will participate only if the price is good. Either
type of auction can (at the option of the committed party) involve an "opening
bid" which will result in no transaction if the opening bid isn't taken by
anyone. When the first real bid is made, it is almost always equal to the
opening bid.
In a reverse auction, the first bid by a potential seller sets a transaction
price, which must be underbid by other sellers. In a standard auction the first
potential buyer bids, setting a price which must be over-bid by other buyers.
In a reverse auction the price goes down as the auction proceeds. In a standard
auction it goes up as the auction proceeds.
Perhaps most important is to realize why auctions and reverse auctions are
used. There are actually four fundamentally different types of transaction
markets, of which auctions are two. The crucial difference in the four types of
markets is in which side knows more about value.
- Reverse auctions are used in situations where the buyers do not know in
advance how much the good or service is worth, so they give complete control of
the price-setting to the sellers. All bids come from sellers. Examples include
contractors bidding for a publicly-funded civil engineering project: the
government has no good idea how much it should cost.
- Standard auctions are used in situations where the sellers do not know how
much the good or service is worth, so they give complete control of the
price-setting to the buyers. All bids come from buyers. Examples include FCC
radio bandwidth blocks, "A night on the town with Robert Munafo", antiques and
curios: the seller has no idea how much their property or service is worth.
- When both sides of the market have a good idea of the value of the good or
service, traditional fixed-price transactions are used. There are no bids of
any kind, just an established fixed price. Most mass retail markets serve as
good examples. Neither side allows haggling because both sides know how much
the thing should be worth.
- When neither party has a good idea of the value of the good or service,
one-on-one or many-to-many haggling is used (the modern term for this is
"double auction"). Bids come from both sides. Most stock and commodities
exchanges are good examples of ongoing markets based on haggling. The "double
auction" can be either like a haggling session where the buyers start low and
the sellers start high and they eventually meet somewhere in the middle, or it
can be continuous like the stock market. In the continuous case, whenever a
buyer's and seller's bids meet they conduct a transaction, and only one is
satisfied (the one who was trading a smaller number of items). All the
remaining buyers and sellers haven't "met in the middle yet" so future
transactions will usually occur at a different price. Also, both sides will
frequently "move away" from the middle by cancelling their bids and making new
bids more favorable to their side. It is harrowing work.
All four scenarios are subject to various inefficiencies, and all are
potentially vulnerable to conspiracy (collusion) between buyers or between
sellers. None is an adequate substitute for any of the others, although the
continuous double auction (stock exchange model) is the best approach to use
when you don't have any idea of which approach is best.
It is misunderstanding of these few basic concepts that lead to so much
misunderstanding of auctions and what purpose they serve.
- Robert Munafo
References:
http://www.webcom.com/agorics/auctions/auction1.html
http://www.computerretailweb.com/news/1998/state061298.asp
In lugnet.market.auction, Larry Pieniazek writes:
> [...]
> Since we have several buyers competing for scarce sellers, seems to me
> we have a reverse auction going here, even though we don't currently
> have any sellers. I hope this will shake some loose. Or even wake up TLG
> to the value of a train parts pack.
> [...]
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