How does dutch auction work

Emphasis is placed on self-tender offers between , as case study. Design of an Internet-based system for remote Dutch auctions , Rockoff, T. Internet Research , 5 4 , This app is intended to work in real life, and provide all the features of a normal Dutch auction, like the ability for all bidders to start at the initial price of a stock, amongst numerous others.

Dutch auction versus fixed-price self-tender offers for common stock , Kamma, S. Journal of Financial Intermediation , 2 3 , This research explores the differences between Dutch auction self-tenders and fixed-priced stocks.

The objective is to show that shareholders get more returns on retiring greater equities fractions on Dutch than fixed stocks after the cost of equity retirement has been deducted.

Incentives and behavior in English, Dutch and sealed -bid auctions , Coppinger, V. Economic inquiry , 18 1 , The research explores the difference in the price behaviour of the English and Dutch auction, and the First-price auction and Second-price auction. These parameter combinations, and others, can generate distributions of winning bid price similar to the empirical data, as can be seen in Fig. This represents an interesting theoretical observation that participants were less sensitive to changes in the stated cost i.

This may suggest a reference point effect. We constrained our model to use a very standard account, in which all prospects were treated as changes from a zero-dollar reference point. However, our players may have treated the prospects differently, as gains and losses relative to their current circumstances.

With nonzero reference points, the nonlinear effects of the weighting and utility functions are changed, leading to effects such range compression and expansion e.

This represents an interesting insight that may be investigated in future research. The model produces predicted distributions of bids that are similar to the empirical data, for some parameter values. We wanted to test more specific predictions of the model by examining predictions of auction starting price, for which prospect theory can be used to make predictions in Dutch auctions see Kuruzovich There is a lack of consensus in the general auction literature not necessarily Dutch auctions concerning the effect of starting price.

Some evidence shows lower starting prices lead to higher bids e. Based on eBay field data and survey experiments, the authors found low starting prices attracted more bidders and thereby result in higher final prices.

Walley and Fortin confirmed in their controlled field experiment that lower starting prices increase the number of bidders and eventually final prices. Ariely and Simonson also confirm the results of Ku et al. However, and in contrast to Ku et al. The authors argue that this can be explained by an anchoring effect: starting prices may serve as a value signal for bidders, with higher starting prices indicating a higher product value.

Although this effect has not been examined in Dutch auctions, Kuruzovich argued that because Dutch auctions start at a high price and decrease they should theoretically produce higher revenue compared to ascending price auctions; however, this was not empirically tested. In both Experiments 1 and 2, there was a positive correlation between starting price and price of winning bids, in both fixed- and multi-unit Dutch auctions. We found that the price of winning bids was significantly different when separated into high and low starting price bins.

Here, we implement the same analysis on the simulated data from our prospect theory based model and show the model predicts this qualitative pattern. Figure 15 depicts the positive relationship between the auction starting price and the price of the winning bid for model-simulated data. Positive relationship between auction starting price and winning bid for continuous left and discrete middle conditions in model simulated Dutch auction group bidding.

Mean bid price across low and high auction start prices right in the model-simulated data displays the same increase pattern in bid prices as the empirical data cf. We explored this relationship across different bin sizes in Appendix A and found it to be a robust effect in both data sets. These results suggest starting price is related to the price of the winning bid in fixed unit Dutch auctions under continuous and discrete step-rates.

This finding is important for both theoretical and practical reasons. From a theoretical perspective, it allows to compare the empirical pattern with model predictions.

Practically, starting price of an auction is a design choice of the auctioneer or market designer. If they start the auction with too high a price, they might waste valuable time, which is especially critical when selling perishable items as is the case in most Dutch auctions.

If they start too low, they might miss out on additional revenue as predicted by both our data and model. The current study aimed to develop a computerised platform for Dutch auctions and test how different design parameters affect the decision-making processes involved in this competitive group context. Results from Experiments 1 fixed item quantity and 2 variable item quantity showed no significant effect for different patterns of price changes on the price or time-step of the winning bid.

There was no difference in the price or step of the winning bid between testing blocks. This suggests that participants either 1 began with a good estimate of item value or 2 did not change their bidding behaviour through experience.

Empirical data were collected in-lab. This had limited the sample size, as the scheduling of multiple participants to concurrent testing is non-trivial.

Future studies could employ online testing to obtain larger sample. However, in-lab testing rewarded the study with very real and vivid group context. In post testing interviews, some participants reported they were excited by the competitive nature of the task. Future research may look into physiological measures, to assess arousal and how it affects bidding behaviour a-la Malhotra et al. In conclusion, this paper offers theoretical and practical contributions.

On the theoretical side, we developed an adaptation of prospect theory that can account for bidding behaviour in Dutch auction. The model successfully captured both patterns. Our testing platform provides an exciting avenue for future research into biding behaviour. The Dutch auction allows to investigate the way multiple participants within a group balance risk of missing the bid and cost bidding price and serves as an ideal context for the study of competitive decision making.

In addition, players could also be presented with information about the warehouse status of their competitors, but in the present experiments this feature was turned off, so that kind of knowledge was implicit. Note that the distribution f need not have a total mass of 1 because the decision-maker may believe that it is not certain another player will buy at all.

Also, we could allow the decision-maker to have separate beliefs about the distributions for each of the other players. Adam, M. Bidding behavior in dutch auctions: Insights from a structured literature review.

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In a Dutch auction, the company offers its securities for bid at a high price. The initial price is high enough that the company does not expect to sell any securities. The Dutch auction Auction where prices start high and decrease until a bidder signals willingness to pay, at which point the auction stops. The Dutch auction is so-named because it is used to sell cut flowers in Holland, in the enormous flower auctions.

A strategy in a Dutch auction is a price at which the bidder bids. Each bidder watches the price decline, until it reaches such a point that either the bidder bids or a rival bids, and the auction ends.

However, no new information has become available and there is no reason to revise.