Auction Beginners Buide

Types of Auctions

Before you dive into buying or selling, you need to understand there are several different kinds of auctions, each with different rules and complicating factors. Here we've defined the primary auction types you'll find online (Dutch, reserve, and straight) and isolated some of the complicating factors.

Dutch Auction: This is an auction in which the seller lists multiple quantities of an identical item. With multiple items up for sale, multiple bidders can win. Also, one bidder can try to buy more than one quantity. All winning bidders pay only the lowest successful winning bid amount. This is different from a Yankee auction, in which each winning bidder pays his or her exact high bid.

Complicating Factors: So how do you become one of the winning bidders in a Dutch auction if there are more bidders than items for sale? Well, it depends on the number of items each bidder wants. If every bidder wants just one item, then it's a more straightforward process. The highest bids for each item wins 1 item. For example, if there are 10 cellular phones up for auction, the 10 bidders with the 10 highest bids win 1 phone each. But how do you determine the final price if the high bidders all made different bids? Good question--hence, the rule: the final price is the lowest successful bid. If 30 bids were made for 10 items, and the 10th highest bid was $85, all 10 high bidders will pay $85--even if the highest bidder bid was $105.

How do you win multiple items in a Dutch auction? Here's an example: A single seller puts five identical items up for sale in a Dutch auction. At the close of the auction, there are multiple bids from four different bidders. Bidder one has bid $10 on each of the three items; bidder two has bid $7 on one quantity; bidder three has bid $5 each on three items; and bidder four has bid $4 on one item. In this scenario, bidder one would receive all three for $5 each, and bidder two and three would receive one for $5, while bidder four's bid would be unsuccessful. In essence, high bids secure a "right to buy" among the winning bidders.

Reserve Auction: This is an auction in which the item for sale has a reserve price. The reserve price is the lowest price at which a seller is willing to sell an item. Although the reserve price is not listed per se (the auction posting will be marked as "reserve met"), it can be extrapolated when a bidder bids at or above the reserve price. The high bid will automatically be elevated to the reserve price, providing the current high bidder with what the seller would agree to sell at.

Complicating Factors: If the reserve price is never met, the seller is not obligated to sell the item to the highest bidder. (However, a fee is typically charged to the seller if the reserve price is not reached.) Likewise, high bidders are not obligated to pay if the reserve price is not met. Sellers can't state, "OK, you were close enough. Send me your high bid. If you don't, you're a deadbeat and I'll zap you with a neg." Also, sellers cannot set a reserve price for items in a Dutch auction. Finally, be aware that some users avoid reserve auctions, preferring the openness of a standard straight auction.

Straight Auction: Also referred to as an absolute auction, this is an auction in which there is only one item up for sale, and there is no reserve price. The seller sets the opening bid and must respect the final price at the end of the auction. This is the most common type of online auction.

Complicating Factors: The seller is not obligated to set a low opening bid. In fact, the seller can set the opening bid below cost, above cost, or right at the item's market value. Don't confuse a high opening bid with a reserve price. In fact, a seller can set a high opening bid and a reserve price. Interestingly enough, some buyers prefer a high opening bid to a reserve price so there is no guesswork about the item's perceived market value. (In general, we advise against setting exceedingly high opening bids. This lessens the visibility of your auction. Bidders are attracted to auctions that have low initial listing prices, so that there is still a chance to buy below market value.)

A straight auction can also be designated as a private auction, in which the identities and emails of the bidders remain anonymous. Typically, the seller selects this format on the assumption that more users will participate if the general public cannot identify them.

Other Variations

As the popularity of online auctions continues to increase, we have seen more and more variations on the online auction format. Two newer formats include reverse auctions and fixed-price sales. In both cases, the name pretty much says it all.

In reverse auctions (conducted on sites like Priceline.com and eWanted.com), buyers post a listing for an item or service, and sellers bid their prices down to make a sale. As for fixed-price sales, many auction sites now offer their sellers a fixed-price listing option. A seller lists an item with a threshold "buy now" price, and once that bid amount has been reached, the auction immediately ends and no more bids are accepted. While some auction purists aren't happy about the growing integration between online auctions and fixed-price sales, the two pricing formats offer buyers and sellers greater flexibility.