In a Dutch Auction, the auctioneer opens with a high price, and lowers it until a bidder accepts the current price (this is almost the reverse of a standard auction). It is for this reason that this form of auction is also called a "descending-price" auction.
If there are multiple identical items, there are two possibilities, depending on the terms of the auction.
- The winning bidder may then have all of the items that he wants at that price, and anyone else who wants some must pay that price (uniform pricing)
- The winning bidder takes as many as he wants at that price, and the remaining items are again auctioned with the price descending until all are sold. (descending pricing)
The name is said to come from the "dutch flower auction" - auctions of tulip bulbs in Holland that started in the 17th century.
Standard Auction
Compare the Dutch Auction to a standard auction where the auctioneer usually begins with an opening price based on market value, previous experience with similar items, and the mood of the crowd. If no bids are received, he will lower the price to establish the base. Either way, the auctioneer then attempts to 'bid up' the item until the highest possible bid price is reached. Items may even be bid past market-value in a phenomenon called "auction fever".
- Dutch Auction: Winning bidder pays the lowest bid price
- Regular Auction: Winning bidder pays the highest bid price.
T-Bills Sold at a Dutch Auction
Oddly enough, many investments and financial issues are sold in this manner.
- Treasury Bills (T-Bills) - using descending pricing, the Treasury accepts higher bids first and and accepts progressively lower bids until an issue is completely sold.
- Initial Public Offerings (IPO) may be sold through Dutch Auction.
- Stamps (collected by philatelists) are sometimes sold this way
Reverse Dutch Auction
In an ordinary auction (also known as a forward auction), buyers bid on a good or service, and the highest bid wins. In a reverse auction, sellers offer progressively lower quotes for a good or service. Examples include
- The lowest-bid contract for a particular job
- Corporate Repurchase of Shares. A company may want to repurchase its own outstanding stock, and will hold a Reverse Dutch Auction to determine the lowest possible buyback price that shareholders will accept.
Dutch Auctions for Charity
Some charity events may use a Dutch Auction as a fundraiser if they have many donated items and need to move them quickly.
Because bidders know the money goes to charity, the auctioneer may open with a bid well above the retail price or market value of the auction item. If he estimates the mood (and pocketbooks) of the crowd correctly, items will sell fairly quickly at relatively high prices. Since bidders have a list of the items to be sold, they may hold off bidding until a particular lot (item) comes up for auction then make a high bid to get it.
Signed sports memorabilia and numbered prints by well-know artists are common Dutch Auction items at charity events.
What Is a Dutch Auction IPO?
According to Bruce Gottlieb, writing on Slate (Thursday, May 6, 1999), a Dutch Auction Initial Public Offering (IPO) is "getting a lot of attention, partly because it uses the Internet, and partly because it claims to be a fairer way of selling stock. Some high-profile firms, including Salon, have chosen it."
Just as for tulip bulbs, the price starts high. The issuer of the stock sets a high opening price and lowers it until someone bids on a block of shares. Eager bidders may pay more for their block, but those who wait too long seeking a really low price may find that the shares are all sold before their price point is reached.
A Dutch Auction may be a good way to pick up a bargain (more so for investments than for charity items) but a bidder who waits too long for a lower price may find the item gone.
Thomas Alan Gray - Tom has been writing for over 30 years; curiosity leads him to dig into a wide variety of topics.
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