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July 27, 2013 / subramanyam

Dutch Auction

          We all know the English way of auctioning stuff. Here the seller shows the item that’s getting auctioned and the prospective buyers will start giving the prices at which they are ready to buy it. The price/bid keeps increasing till the point where one buyer has the maximum price and the item is auctioned at that price. However there is another auction that happens and it is called the Dutch style of auction.

          In a Dutch auction, the seller raises the price by a huge margin and starts decreasing the price as the auction proceeds. For example, if an item costs $10000 the seller might start the auction at $15000. In case no one takes the item at that price, he would further lower it by some amount and again announce the price. For example he might want to come down in multiples of $500. So in case no one took the article at $15000, he might come down to $14500 and in case there are no buyers there he might want to come down $14000, $13500 then $13000 and so on.

          Now if there is prospective buyer who is ready to buy it at $13000 the price is accepted and he/she is declared the winner of the auction. No further bids are accepted in this case. In essence, your first bidder is your winner. The first price at which a buyer was ready to buy the good is the final price.

          This sort of auction is very good when you have got to sell a lot of goods in short span of time.

          Interestingly there is a Dutch version for the IPO also. Here people submit their bids along with the price they want to pay and the number of shares they wish to buy. For example, Imagine there are only 3000 shares in an IPO and there are only 4 bidders A,B,C and D. (I know its impractical but just imagine for the sake of an example) Person A locks bid for 1000 shares for $150, person B locks bid for 1000 shares for $125, C locks bid for 1000 shares for $100 and D locks bid for 1000 shares for $80.

          Once all these bids are locked, the allotment begins from the highest bidder to the lowest. For example A and B get their 1000 shares each and C gets his 1000 as well, D will nor get any. However, the price A, B and C pay is $100 only, which is the price of the last successful bid(C’s bid). Irrespective of the price you used in your bid in case  the price in your bid is higher than the last successful bid, you get your shares and pay the price quoted in the last successful bid.   Now,  isn’t this interesting!!!

          Interestingly, Dutch are the leading flower producers in the world. They auction their flowers also very much in their own Dutch auction way. Have a look at this video.

Interesting stuff isn’t it ???


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