Dutch Auctions

Many people are confused as to what a Dutch Auction really is so I am going to try to explain.

In a live Dutch Auction, a seller offers an item up for bid at a very high price. The price is much higher than the value of the item and no seller expects to get the initial price. However, the auctioneer begins with the high price and lowers the price incrementally until a bidder is willing to accept the price or the seller's reserve price is met. This type of auction is popular when it is important to sell an item quickly, since one bid is all that is required.

Dutch Auctions are useful for selling multiples of the same item. For example, if a business has three computers for sell, the first bidder may purchase one computer for $1200, however, the auction will continue since only one computer has been sold. The price will continue to go down until the next bidder chooses to accept the price, say $1000 for example. Since the auction began with three computers to be sold, the auction continues. The price continues to go down and the bidders become anxious since only one computer is left. When the auction reaches $800, the price the seller has set as the reserve price, no other bidders have indicated a williness to pay the price and the auction ends with only two winners. One paying $1200 and one paying $1000.

At first glance, it appears the sellers could be losing money in a Dutch Auction; however, in reality the sellers generally make more than they would with the traditional auction. In a traditional auction, bidders do raise the price but they rarely raise the price above the item's actual value. They have no reason to act fast because they know exactly when the auction will end and in some auctions they can sneak in a last minute bid that is slightly higher and almost instantly become the winner. In a live Dutch Auction the bidders have to act fast because they have no idea when the auction may end. Therefore, even though the price is being lowered, bidders will end up paying at or even above the item's value. Remember the starting price was much higher than the items real value.

Dutch Auctions are also used in online auctions where several identical items are sold at the same time to an equal number of high bidders. Online auctions work a little differently to the one above. At the time the seller initiates a listing, the seller indicates how many items are available for the Dutch Auction. Bidders place bids on the items until the auction ends. At the end of the auction, the top number of bidders equal to the number of items up for auction will be the winners, unless a reserve price has been indicated. An example would be a seller has four identical computers for sale and the reserve price is set at $800. At the end of the auction period, bids are placed for $1500, $1200, $800 and $600. Since the reserve price is $800, there are only three winners who pay $1500, $1200 and $800 respectively.

As you can see the biggest difference between live Dutch Auctions and online Dutch Auctions is the fact that sellers do not have the opportunity online to set a high starting price and drop the price incrementally. The seller has to accept the top bids, regardless of price, up to the number available or the reserve price is met.

Of course you should keep in mind different online sites handle Dutch Auctions in different ways. Some take an average of all the bids placed and charge all of the winning bidders the same price. Some charge the winning bidders the lowest price bid.

The above is intended to give you the general concept of Dutch Auctions and is not intended to be the only way Dutch Auctions can be handled. The key is multiple identical items are sold through one auction.