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Whenever people think of online auctions, people think eBay. The most common eBay auction is an ascending bid auction,
so the price keeps rising until only one person is willing to pay for an item.
However, what if nobody is interested in the item that a seller is selling? The seller still must pay various fees for
posting an item.
eBay also has a complicated descending bid auction system for auctions where many identical items are listed under one auction.
Elliot Moskow, a junior at Bates College, wanted to make money on eBay auctions by buying low and selling high. When it came to setting up a storefront and selling his items, he could not sell them. He became frustrated with the fees that he had to pay for nothing. A friend told him about the Dutch tulip merchants who run descending bid auctions. Moskow took this idea and created his own online company, Pricefalls.com. At the moment, the company is the main seller of items, selling items through agreements with retailers. In the future, however, it will begin to scale back its agreements with retailers as the site becomes more popular.
Pricefalls works almost exactly like the Dutch auction. An item starts at a very high price and every fifteen seconds, the price drops by an increment. The seller, when listing an item, says which price to start the auction at, which price to end the auction at, and the length of the auction. Using these, the computer automatically determines the increment to drop the price by. The buyers can do one of two things. They can either list a price that they will be willing to pay or buy the item at the current price. If they list what they will be willing to pay, they will win the item if nobody wants the item. This shows why the Dutch auction or descending bid auction is synonymous with the first price sealed bid auction. In the descending bid auction, the price falls until somebody feels that the price is low enough for them to buy it. In the first price sealed bid auction, the person willing to pay the highest will win. In the Pricefalls auction, listing what you are willing to pay is like participating in a first price sealed bid auction, while buying the item at the current price is like participating in the descending bid auction. In both cases, the person with the highest bid wins and pays whatever they bid.
So does an online Dutch auction actually work as well as an ascending auction? The ascending auction strives for a market-clearing price, a price where only one buyer will be willing to pay for the item and the other sellers will be happy with getting nothing. On the other hand, the descending auction strives for the opposite effect. As the price drops, more people want to buy the item. If the prices stay high enough, they will have a market-clearing effect. However, if the price is allowed to drop lower, a constricted set will be created. The constricted set is where multiple buyers (Set A) want to some items (N(A) or Neighbor of A), but the number of buyers is greater than the number of items that they are looking to buy ( A > N(A) ). Unlike the ascending auction, where there is a clear Nash Equilibrium (as shown by Game Theory, the Nash Equilibrium is to bid what you think the item is worth to you), there is no clear Nash Equilibrium in a descending auction. This is because if you are willing to pay $20 for something and the next buyer is willing to pay $10 for it, it is clearly better if you bid lower than $20. However, if you are willing to pay $20 for something and the next buyer is willing to pay $19 for it, you will lose the item by bidding a lower price. Since the dominant strategy is determined by multiple factors, it might be more interesting to participate in a descending bid auction.
Pricefalls is still a new company, so it remains to be seen whether people will like a descending bid auction or a Dutch auction better than the classic ascending bid auction in eBay. It does, however, let more people participate and compete over an item, which they might not be able to win otherwise in an ascending bid auction.
