Sunday, December 7, 2008

Auction based business models

Auction based business models have been recorded as early as 500 B.C. They are mostly used for unique items that are not frequently traded, and therefore don't have a well established market value. Some typical uses of the model are within antiques, real estate, collectibles, spectrum auctions (i.e. communication networks) and the sales of businesses. However, several examples of auctions based business models for frequently traded, new and used items exists (e.g. eBay, Amazon).

The basic form of an auction is where several potential buyers repeatedly bid and are aware of each other's previous bids, with the item sold to the highest bidder. The variations on the basic auction form are many, including number of sellers and buyers, limits on bid prices, time limits, open or sealed bids, open or secret reserve price, and rules for determining winning bidder and sale price. The auction broker often charges the buyer or seller a listing fee and/or commission based on the value of the transaction.

In a forward auction (demand) a number of buyers bid for an item being sold (e.g. eBay)

In a reverse auction (supply) a number of sellers offer an item that a buyer requests (e.g. Amazon)

In a double auction (exchange) a number of buyers bid to buy goods from a number of sellers (e.g. NASDAQ)

Open ascending price auction
("English Auction")

Participants bid openly against each other with each subsequent bid higher than the previous bid, and the winner pays his/her bid.

Open descending price auction
("Dutch Auction")

The open descending price auction begins with a high asking price which is lowered until someone is willing to accept the auctioneer's price.

First price sealed-bid auction
("Closed English Auction" or "Yankee Auction")

All participants submit their sealed bids, one per participant, and when the bidding period is over all the bids are opened and the highest bidder pays his/her bid.

Second price sealed-bid auction
("Vickrey Auction")

All participants submit their sealed bids, one per participant, and when the bidding period is over the high bidder wins and pays the second-highest bid for the good.

Sequential second price auction
("Japanese Auction")

Once the bidding starts, no new bidders are allowed to enter the auction and participants must bid at each level to stay in the auction or drop out.

Auctions selling at very low prices
Some auctions based business models are selling items at very low prices, where the price has limited resemblance to the actual worth of the lot being auctioned such as the Unique bid auctions where the winner is the bidder with the highest or lowest unique bid. The business models behind these auctions (or sometimes lotteries) are:
* Bidders paying for each bid they place
* Bidders paying for participation in auction event
* Sponsored by companies using the auction as advertising
* Sponsored by companies using data such as registered emails

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