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ABSTRACTION METHODS: Abstraction is the process of simplifying the complexities of the real world by ignoring (hopefully) unimportant details, especially (for our purposes) while doing economic analysis. Three common methods of actual, real world abstraction used in economic theories are words, graphs, and equations. Words can be misunderstood. Graphs are a little more precise. And equations tend to be the most precise of the three.

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AUCTION:

A formal market exchange in which prospective buyers make bids to purchase a commodity. An auction is an effective way of exchanging commodities by bringing together buyers and sellers. Auctions are commonly used to exchange financial instruments, agricultural commodities, personal assets, and works of art. Three notable types of auctions are English, Dutch, and sealed-bid.
An auction is an effective way of exchanging commodities, usually bringing together buyers and sellers to the same location at the same time. In some cases, the auction participants are physically in the same room. In other cases, only the bids are brought together, such as with Internet auctions.

Three Types

Auctions have been used for over 2000 years. Given this lengthy history, a number of types of auctions have been developed. The three most common types are English, Dutch, and sealed-bid.
  • English: This is an auction in which the price is set at a relatively low amount, then prospective buyers offer incrementally higher bids until no one bids higher. Highest bidder buys the commodity. This is the most common type of auction. Agricultural commodities and personal assets are commonly sold using the English auction. Internet auctions are an increasingly popular form of the English auction. The English auction allows sellers to extract the highest sale price from available bidders.

  • Dutch: This is an auction in which the price is initially set at a relatively high amount, then sequentially decreased until a buyer agrees to make the purchase. The first person agreeing to the price makes the purchase. Dutch auctions are most commonly used for and associated with the sale of Dutch tulips (hence the name).

  • Sealed Bid: This is an auction in which prospective buyers submit secret, or sealed, bids for a commodity. Once submitted, the bids cannot be changed. Because the bids are secret, one prospective buyer is unlikely to know the bids of the others. The buyer with the highest bid makes the purchase. Financial instruments, especially U.S. Government Treasury Securities, are commonly sold using sealed bid auctions.

Other Variations

Given the history of auctions, a number of other variations have been theoretically suggested and occasionally attempted.

One variation is the theoretical Walrasian tatonnement. In this auction format a hypothetical auctioneer matches up demand prices and supply prices until the quantity demanded balances out quantity supplied and the market achieves equilibrium.

With a Vickrey auction the winning bidder pays the second highest bid price. A variation of the Vickrey auction is commonly used on Internet auction sites in which the winning bid is automatically incremented slightly above the second highest bid.

A fixed-price auction is one in which the seller posts the price of the commodity, then the first person willing to pay that price makes the purchase. Used cars are often informally sold by individuals in this manner.

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AUCTION, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2021. [Accessed: July 31, 2021].


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