What Is A Dutch Auction?

Dutch auctions can offer both buyer and seller some significant advantages.

A Dutch auction is a specific kind of auction in which a seller lists several identical items he or she wishes to sell. The seller sometimes sets a starting bid amount and will indicate how many of the items are available in the auction. Interested bidders for these items must decide how many of the items they desire and also how much they are willing to pay for each item when placing a bid.

At the end of the auction, the bidder who places the highest winning bid for the lot of items is able to buy the items at the lowest qualified bid price made by another of the winning bidders. Winning bids are then selected in order of bid price per item. This means that a higher bid price takes precedence over a lower bid price, even if the lower bidder is bidding for more items. The following is an example to help illustrate:

Let's say there is a Dutch auction in which the seller is offering 20 of the exact same microwave oven. The seller wishes to sell each item for $25.00 at the least. If 20 people bid on the auction and each of them bids the minimum amount, all of the bidders who placed the bids would be winning high bidders for $25.

Now that is a very simple example to get the initial point across. Let's use this same scenario to illustrate a more complex situation. Suppose that 40 people made bids on that same microwave auction. In this example, 32 of the bidders bid $25.00 and the other 8 bidders placed bids of $50.00. The 8 bidders who bid $50 will be the winning high bidders and they will each receive a product at the lowest winning price of $25. The other 12 products will go to the remaining bidders who bid first. The factor most people enjoy about this type of bidding is that each of the winning bidders only has to pay the lower winning price.

In the same example, if 20 people each bid $50, the final price of the auction would then be $50 because the lower bids would no longer be winning bids. Only winning bids figure into the final price of a Dutch auction. If enough people bid higher than the minimum bid, the final price of the item will also increase.

In the case that several bidders desire multiple quantities on the item, the lowest bidder among the winning bidders when the auction ends will not earn the right to purchase the entire quantity that they bid on. This is due to the fact that there are not enough of the auctioned item left to fulfill the bidder's whole bid quantity after the higher winning bidders have been allowed to purchase their quantities. To put it another way, if the lowest winning bidder wanted to purchase a quantity of 6 microwaves, that bidder may only be entitled to 2 microwaves if 18 of the microwaves are allocated to the higher winning bidders. The only way to avoid this potential issue is to ensure that you are not the lowest bidder in the auction.

If a single person is the only bidder in a Dutch auction and places a bid for the full quantity the seller is offering for an amount over the initial bid, that person will be the winning bidder for however many of the items at the desired price bid per item.

In a more traditional Dutch auction format, the auctioneer begins with a high asking price which is lowered until one of the bidders is willing to accept the auctioneer's price. That bidder then will pay the last announced price. This variety of auction is convenient when it is important to auction the products quickly, since the sales will never require more than one bid.

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