Auction Theory in Economics  

Auctions are an event where different parties can bid for the right to purchase a good or service. Auctions are seen as a potentially efficient mechanism for the sale and purchase of goods. They are used for a variety of goods, but, in particular for rare expensive goods, which are hard to price. Auctions have also been made much easier with the advent of the internet which makes possible online bidding.

Ascending Price Auction

This is the simplest and most common type of auction. The highest bidder wins the right to buy the good. Sometimes the seller may set a reserve price to prevent the good for being sold for less than they are happy with.

Descending Price Auction ‘Dutch Auction’

In this type of auction, the price starts high and then starts to fall. The first person to bid gets to buy the good. This type of auction is a way to extract consumer surplus and practise first degree price discrimination because in theory the buyer will pay the maximum price he is happy with. If they don’t they could lose out. However, if he knows the price other people are willing to pay, he may be able to risk bidding at a lower price. But, this becomes risky and if his information is wrong he could lose out.

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