What is a Dutch Auction?

Dutch auctions are also known as "sale auctions". A special form of auction. The auction price of the auction target decreases from high to low until the first auctioneer bids (at or above the reserve price) to hammer the auction. Reduced-price auctions usually start with very high prices, which are so high that sometimes no one bids. At this time, the price decreases from high to low according to a predetermined price reduction ladder until a bidder is willing to accept it. If there are two or more bidders asking for price at the same time, it will be transferred to the increased auction form. In most sale auctions, there are actually many auctions. Because reduced-price auctions are often used in situations where the auction items have different qualities, such as different quality, the first bidder with the highest bid can buy all the items, but often only buys the best of these items at the highest price. Then, the auction continues, and the price drops. When another bidder is willing to accept the bid, he also has the same option, and buys the best of the rest, and then the auction continues. In this case, although the bidders are silent most of the time, there does exist continuous competition among the bidders. The biggest advantage of the reduced auction is that the transaction process is particularly fast, especially the dial-type silent auction method, which makes the auction process mechanized and electronic, and the transaction speed is greatly accelerated. However, the declining bidding process often causes bidders to wait and see, and expect prices to continue to decrease, so the atmosphere of on-site competition is not warm enough. ^[1]

Dutch auction

Reduced-price auctions usually start with very high prices, and to a high degree sometimes no one bids. At this time, the price drops by a predetermined amount until a bidder is willing to accept it.

Reduced price auctions are sellers' price auctions, also known as silent auctions, which can be divided into two types.

Compared with the increased price auction, the reduced price auction also has its outstanding features and advantages. ^[3]

Dutch auctions have two distinctive features.

First, with a certain time interval, the price decreases from high to low according to the predetermined price reduction ladder.

Second, all the buyers (that is, the people who bought the items) are transacted at the final bid (that is, the lowest bid of all the buyers).

In fact, there are also cases of price increases in Dutch auctions, which are not always reduced. When more than one bidder bids at the same price, the auctioneer will immediately switch to a price increase auction, and the process of bidding and increasing prices continues until no one increases the price again. The last bidder who raised the price succeeded. In fact, in most cases, Dutch auctions are conducted by a mixture of upsizing and downsizing auctions, so they are also called "hybrid auctions".

Dutch auctions are characterized by price reductions, so bidders often wait and see, and expect prices to continue to decrease, so the atmosphere of on-site competition is not warm enough. So it has a reputation of "silent auction".

But such auctions are often very fast, and the first person may buy everything. This auction originated in the Dutch flower market. This method is particularly suitable for items that may change quality, are perishable, or are of poor quality, such as fruits, vegetables, fish, flowers, tobacco, etc. Although it is a "silent auction", there is still fierce competition among bidders. If you don't bid in time, others may buy everything, or buy the best quality part.

Inherent flaws of Dutch auctions and their transcendence

The operation mode of modern Dutch auction is: the lot is transported by the seller to the auction market, and after the quality inspection and information entry, the trolley is transported into the auction hall in the order randomly set by the auction market. The product name, quantity, quality, supply Information such as the purchase price and the minimum purchase amount are displayed on the auction clock; the auction price is reported by the auctioneer on behalf of the seller, and it decreases from high to low. Once someone asks (press the button), the cursor stops turning. At this time, the cursor The stopped position is the transaction price. Subsequently, the bidder (purchaser) tells the auctioneer the required quantity through the microphone. After the auctioneer enters this value into the computer, the computer calculates it. If the formula is satisfied: the price of the bidder × the required quantity If the pre-save deposit of the bargainer is deposited, the transaction will be concluded. Otherwise, the computer will reduce the purchase amount of the bargainer to ensure that no overdraft occurs. If there is any remaining after the first bidder purchases, the auction restarts until there is no surplus or no bid (streaming). The next batch of lots enters the auction, and so on until the auction ends. Throughout the auction process, the auction clock and the trolley carrying the lottery kept moving in sync.

In summary, the characteristics of Dutch auctions are: the seller bids, and the price decreases in descending order; the bidding process is a many-to-one non-repeating simultaneous game, and the first bidder, the highest bidder, gets the bid; Information flow and logistics run synchronously, price discovery is tied to physical logistics, and the market is both a trading place and a goods distribution center.

Transaction costs and efficiency of Dutch auctions

(I) Transaction Costs of Dutch Auctions

Information and search costs-The cost of obtaining and searching information depends to a large extent on the means of acquisition and the method of search. Because Dutch auctions are conducted in a certain order, the process of finding a suitable counterparty for buyers and sellers is a serial search process. The time consumed by the entire auction is the sum of the time consumed by each auction.

Negotiation and contracting costs-Auctions are a negotiation mechanism or price game. Because the Dutch auction is a multiple-to-one non-repeating simultaneous game, and only one successful bidder is generated in each game, its signing process is exclusive and discontinuous (that is, it can only be performed after a buyer presses the button One-to-one signing, the auction of the remaining lots must be completed after this signing is completed, which makes waiting for the signing to take a long time. In addition, the current centralized bidding transaction model requires buyers to be present in person or to entrust others to press the button, which has brought about participation costs and principal-agent problems.

Performance and supervision costs-As the information flow and logistics of Dutch auctions run synchronously, price discovery is tied to physical logistics, and the auction market is both a trading place and a goods distribution center, so transportation, handling, and storage are required to complete the contract and delivery , Fresh-keeping, packaging and other operations, these operations have both external logistics and internal logistics, so the Dutch auction logistics costs are huge.

(II) Transaction Efficiency of Dutch Auctions

From the above observations, we know that Dutch auctions have high transaction costs. For most fresh agricultural products with low value, such high transaction costs will inevitably lead to inefficient transaction funds. However, anyone from the Netherlands has claimed that one of the most outstanding advantages of Dutch auctions is their high transaction time efficiency, which is fast. Indeed, anyone who has seen a Dutch auction will be impressed by the rapidly rotating cursor on the auction clock. In principle, Dutch auctions are time-limited transactions, that is, each transaction must be completed before the price drops to the guaranteed floor price, which makes its single transaction highly time efficient. However, the serial nature of the Dutch auction search, the exclusiveness and discontinuity of contract signing made its overall operation time-consuming. In extreme cases, if a buyer's goods happen to be at the end of the auction sequence, he must wait until the end to trade. Therefore, Dutch auctions actually have no time advantage at all, and their local time efficiency is completely offset by their overall time efficiency. For fresh produce, time is money, and any delay in time means a loss of value.

The transaction cost (including capital cost and time cost) of Dutch auctions is extremely high; the transaction efficiency (including capital efficiency and time efficiency) of Dutch auctions is very low.

Obstacles to the application of Dutch auctions on the Internet

The advantages of online auctions are: it can gather more participants across time and space to conduct transactions; it can realize the separation of price discovery and physical logistics; and it can realize the transformation of transactions from serial to parallel. These advantages should be hugely attractive for Dutch auctions. However, after careful search, we found that online auctions are almost all price-rising auctions, and Dutch auctions in the true sense are hardly found.

Why doesn't Dutch auctions work effectively on the Internet? The reason is that the problem is still in the operating mode of Dutch auctions. As mentioned earlier, the Dutch auction is a multiple-to-one repetitive simultaneous game. The first bidder is the winning bidder. In addition, the auction clock is operating at a fast speed. Therefore, participation in the Dutch auction must be fully focused, which means that it requires Pays extremely high monitoring costs. In this way, although the online Dutch auction can realize the separation of price discovery and physical logistics, it is still unable to achieve the transition from serial to parallel. In addition, the search and transaction are still serial, so the exclusiveness and discontinuity of the contract cannot be changed. It can be seen that it is the transaction mode of the Dutch auction that constitutes the biggest obstacle to its effective operation on the Internet, and makes it always unable to enjoy the benefits brought by the Internet.

There are serious inherent flaws in Dutch auctions. It is these flaws that have caused its high cost and inefficiency, and hindered its application on the Internet.