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Auction: Definition, Example and Related Terms

What is a Auction ?

An auction is a process of buying and selling goods or services by offering them up for bid, taking bids, and then selling the item to the highest bidder. In the world of business, this is a common way to sell a product or service to the buyer who is willing to pay the highest price. This process is often used to sell unique or valuable items, as well as goods in bulk. The auction process can be used in various commercial contexts, from selling company assets to procurement. It''s a method that promotes competition and helps to establish a fair market price.

Auctions can be conducted in several ways. For instance, English auctions are the most common form, where bidders openly bid against each other, with each subsequent bid higher than the previous one. Dutch auctions are the opposite, where the auctioneer starts with a high asking price and lowers it until someone accepts the price. Sealed-bid auctions involve all bidders simultaneously submitting sealed bids, so no bidder knows the bid of any other participant. The highest bidder pays the price they submitted.

In procurement, for instance, auctions can be used to obtain competitive bids from suppliers. In this context, the auction can be a powerful tool to drive down costs and improve contract terms. Similarly, if a company is selling assets, an auction can help the contracts manager to maximize the selling price. However, auctions can also be complex and require careful planning and management to ensure fairness and compliance with relevant laws and regulations.


  • Scenario Description
    A tech company wants to sell its patent for a new technology. In this example, the company can hold an auction for the patent. Interested buyers will place bids, and the company can sell the patent to the highest bidder. This ensures that the company gets the best possible price for its patent.
    A manufacturing company needs to buy a large quantity of raw materials. The company can invite suppliers to bid in a sealed-bid auction. Each supplier submits a bid without knowing what others have bid. The company then awards the contract to the supplier with the lowest bid, ensuring that it gets the raw materials at the lowest possible cost.

Related terms