Auctions have taken on a whole new meaning in recent years with the advent of third-party online auction web sites which have millions of members from every corner of the globe who are bidding on thousands of auctions 24 hours a day, 7 days a week. Even though for many people these online auctions were their first introduction to the activity, auctions have a much longer history and have been used for purchases with great importance.
Most people don't realize how much auctioning is going on every day. Treasury departments auction off gold, securities, and other valuable items in order to raise money for home countries. Businesses auction off their goods to buyers in order to get better prices to reduce transaction costs. Banks, colleges, merchants, and housewives are often all involved in auctions of one type or another although they may not necessarily view them as an auction.
One reason that auctions are so widely used is that they provide a number of benefits for both buyers and sellers. Sellers can usually get a better price than might be possible in a fixed-price market since all potential buyers will place a different private value on the available goods. Buyers, on the other hand, are usually able to get items they want without having to pay as much as they otherwise would be willing to. Plus, auctions don't include the stress and time constraints of one-on-one price negotiations. There's no pressure on either party.
Another benefit is that auctions can literally be used to sell almost anything. Unlike fixed-price markets that are usually only effective for items that share a common value, auctions are open to items and services that could not be readily sold in those types of markets. Land, for example, is often auctioned off because even though there is some common value to land, its real value is based on the potential that each buyer sees in the land. Wine, flowers, business services, livestock, and more are all commonly sold via auctions for this same reason.
Besides these benefits, auctions also attract participants because they are literally one of the purest types of markets left in existence. An auction is pure because both parties are focused on getting what they want out of the auction: sellers want to generate the largest amount of profits and bidders want to pay less than the value of the item. Watching an auction in progress either online or offline is like seeing the laws of supply and demand in action. Because the supply of the goods are limited, the prices are set by the demand for those goods. The more people who want the item and the greater their desire to have that item, the higher the price is going to be when the auction closes. In no other marketplace are buyers given so much power to determine how much they will pay.
Despite these benefits and characteristics of auctions, the biggest disadvantage is the so-called Winner's Curse. This term refers to winning bidders who end up paying more for an item than it is truly valued at. The more information a bidder has about the item being auctioned off, the less likely the bidder is to be affected by the Winner's Curse.
Another disadvantage is the opportunities that exist for collusion among auction participants. Sellers can plant bidders to artificially inflate the bidding prices, thus increasing their own profits and costing bidders more. Bidders can also form rings. These rings include several people who agree not to outbid one another, then once the item is won for a lower price it is auctioned off among the members of the ring. Rings make it possible for bidders to get the items they want without paying too much, but they also can cheat the seller out of getting a price in close proximity to the item's actual value.
Regardless of these disadvantages, auctions have been proven to be effective marketplaces that work for the disbursement of a wide number of goods and services. Both sellers and buyers are able to fulfill their own needs in the auction setting. Often, this is simply not a possibility in fixed-price marketplaces.