What is an 'Auction'

An auction is a sales process in which potential buyers place competitive bids on assets or services, either in an open format or closed. The asset or service in question will be sold to the party that places the highest bid in an open auction, and usually to the highest bidder in a closed auction.

BREAKING DOWN 'Auction'

In an open auction, parties come together at a physical venue or online exchange to bid for an asset. An interested party knows the competing bid amounts and continues its bid decisions until it either is declared the winner of the auction (i.e., it submitted the last highest bid under the time limit of the auction) or drops out of the auction. This process is easy to imagine in an auction room at Sotheby's or Christie's for a work of art.

In the internet world, eBay is known as the innovator and giant in online auctions. In many business transactions including a sale of assets of a company or an entire company itself, auctions are conducted in a closed format, whereby interested parties submit sealed bids to the seller. These bid amounts are only known by the seller. The seller may choose to hold only one round of bidding or it may select two or more bidders for an additional auction round. Sometimes in a situation where a division of a company or the whole company is up for sale, price is not the only consideration. The seller, for example, may want to preserve as many jobs as possible for its employees. If a bidder does not submit the highest price but can offer the best terms for continuity for employees, the seller may select that bidder.

Other Types of Auctions

A variant of the traditional auction is a dutch auction. Google (since renamed as Alphabet Inc.) used this process when it issued its initial public offering (IPO) in 2004. In this form of auction, prospective buyers submitted bids that included the number of shares desired and what they were willing to pay for them. After the auction ended, the underwriters sorted through bids in order to determine the minimum-priced bid they would accept from buyers. The IPO ended up being priced at $85 per share. Dutch auctions are rare in pricing IPOs.

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