The phrase Dutch auction is used to describe one of two types of selling formats. First, it describes an auction where the seller lists multiple, identical items. The second meaning of Dutch auction is when a process of reverse bidding is used.
Multiple, Identical Item Listings
This online auction selling format is used to list multiple, identical items for sale. In this type of auction, interested buyers will specify the quantity of the items they would like to purchase and the amount they are willing to pay for each one. The winning bids are determined by multiplying the bid price by the number of items bid on. This type of auction is also called multiple item auctions.
Historically, in online auctions eBay offered this is a selling format; however it was discontinued in 2009. Now, sellers are encouraged to use eBay bulk listings when more than one of the same item is available for sale. This is an eBay Fixed price listing format.
A Reverse Auction (Price Lowers)
The second definition of Dutch auction that is used in online marketplaces describes a type of auction listing where the price of an item is lowered to achieve a bid. Using this format, a seller would start with a higher than average bid price for the item, but lower the bid over time until a potential buyer accepts the current price or the seller’s predetermined reserve price has been met.
Security Markets and Dutch Auctions
While the phrase Dutch auction is used in online marketplaces and auction sites, it’s more commonly associated with security markets and initial public offerings (IPO) or to buy back shares.
In security markets, investors typically indicate how many shares they are willing to purchase and the price they are willing to buy at that price. The auction will start with the highest price and the price will lower until bids received cover the offer quantity. This type of auction is also called a uniform price auction.
The Dutch auction format is also used to buy back shares for cash. According to Laurel Hill Advisory Group, some characteristics of candidates for a Dutch auction include the following: accumulated excess cash, stock that is currently under-priced, low daily trading volume, or the desire to reduce small shareholders.
