How Auctions Work
The basics of auctions are very simple and have scarcely changed throughout recorded human history. Someone with something to sell or trade goes to a public place and announces his auction. Buyers who want what he is offering gather and start offering money or goods to trade — they are placing “bids.” As long as the bids keep coming and keep getting higher, the auction continues. Finally, one buyer demonstrates that she wants the item more than the other buyers do. She will outbid them. She wins the auction, claims her purchase, and goes home. Or, she goes down the road to another trading site and puts the item up for bids, hoping to make a quick profit on what she has just bought.
Buyers sometimes allow their emotions or ego to be caught up in a bidding frenzy, and they experience
Until the Internet and World Wide Web made bidding from afar available twenty-four hours a day, seven days a week, the vast majority of auctions were local and staged for only short periods. Buyers had to travel to the auction site to examine the goods, make offers, pay, and lug the items home.
A Quick History of Auctions
No one knows when or where the first auctions were held. However, the sessions likely involved the buying and selling of slaves. Some scholars believe the Romans set up the first organized auctions of goods several decades before the birth of Christ. In the sixteenth century, the British held auctions for books and artworks. Later, English settlers brought their auction experience to America in the seventeenth and eighteenth centuries, but the concept did not find much favor in the Colonies, where survival was often a daily and individual struggle. When slaves were brought to America, the slave traders used human auctions to get the highest prices from buyers. After the Civil War, military officers traveled the country, auctioning off surplus equipment and seized goods. In the 1920s and 1930s, as the United States struggled to overcome a great drought and the Great Depression, auctions became linked with trouble. When people could no longer make their house and land payments, creditors seized their properties and often sold them to the highest bidders.
Today, auctions have a much better reputation. Indeed, they can be found in many areas of the American economy. Some typical examples include:
Livestock and horse auctions
U.S. Treasury auctions of financial securities such as bonds
Auctions of properties and merchandise seized by the local, state, or federal government agencies for non-payment of taxes or involvement in criminal activities
Business inventory reduction auctions
One reason auctions are so popular is that they provide benefits to sellers
Meanwhile, buyers like auctions because (1) they can often get items for prices much lower than they would have to pay at a store; and (2) they can often locate hard-to-find items such as pristine collectibles or repair parts that are no longer available from dealers or factories.
Three other benefits of auctions include:
Virtually anything can be put up for bid.
Buyer and seller are not face-to-face. Therefore, neither party is under pressure to negotiate or make a deal.
The law of supply and demand keeps the playing field somewhat level. Sellers set the opening bid price; buyers decide how much they are willing to pay.
If several similar items are up for auction, and there are few takers, prices will stay low. Someone who happens to need one of the items will get it for a bargain price. If there is strong demand and the desired item is in short supply, bidders may swarm in and bid up the price to a level that amazes and delights the seller.
In a perfect world, auctions might be the perfect marketplace. Unfortunately, traditional auctions sometimes draw a few opportunists and thieves, as well as well-meaning buyers and sellers. For example, a seller may have a few“associates” sprinkled throughout the auction crowd. Their job is to place some bids and keep pushing up the price the winning bidder will pay. Meanwhile, buyers at an auction sometimes conspire among themselves to hold bidding prices down by agreeing not to outbid each other.
In online auctions, a seller may have one or two friends placing “shill” bids that help drive up the selling price for his items. But conspiracies among bidders are unlikely, since they may be scattered all over the world.