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Forward Auction: Definition & Examples

Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has taught math at a public charter high school.

After reading this lesson, you will learn that there are actually two types of forward auctions. There is the one that you are most familiar whose prices increase with each bidder, and another one where the prices drop!

Definition

Imagine that you are sitting in an auction house watching an estate auction sale going on. This auction is for all the belongings of a really famous television star. You are there because you want the shirt that he used to wear to concerts all the time.

Oh, here it is. The auctioneer starts the bid at $300. Someone beat you to it and says he'll take it for $300. You raise your hand and yell out $350! Another person also raises her hand and yells out $400. Oh no. The auctioneer keeps yelling out the prices: $400, $450, $500, $550, Sold! Thank goodness, that was you.

You have just bought the shirt for $550. You have just gone through what is called a forward auction. Such an auction has one seller with many buyers competing with one another.

Four Types

There are actually four types of forward auctions:

  • English auction
  • Dutch auction
  • Japanese auction
  • Yankee auction

English

The English auction is like the one above where an item begins with a minimum price and goes up from there. This is the most common type of auction that you'll come across. In everyday speech, when people say 'auction', this is what they are referring to.

Dutch

The Dutch auction works a bit differently. With a Dutch auction, the bid begins at an extremely high price. It then drops from there until an acceptable buying price is reached. You won't see this type of auction as often. This is often used for perishable items like veggies and flowers, but companies use it for IPO bids as well, and some countries use it to sell securities.

An example of a Dutch auction could be for a big box of farm veggies. The beginning price is $300 for the whole box. It drops to $250, $200, $150, and then $100 when a buyer finds the price acceptable.

Japanese

In a Japanese auction, the price keeps going up in specific and regular increments until one bidder is left. Instead of raising your hand to bid, you raise your hand to drop out when the price is too high for you. The last bidder remaining wins the auction.

Yankee

A Yankee auction is similar to the Dutch auction except instead of a single item, it is now a whole lot. For example, instead of a single car, you are now bidding for a whole lot of 500 cars! Each bidder writes down his or her highest bid he or she is willing to pay for the whole lot. The one with the highest wins the entire lot.

Companies

There are many companies that offer forward auctions. One that you may be familiar is eBay. On eBay, you can bid on an item that you want to purchase. You'll see the price start low and then going up as more and more people begin to bid on the item.

Each item has an auction end time, at which the bidder with the highest bid wins the item. You'll also find English style forward auctions storage unit auctions, car auctions, and livestock auctions. Police auctions are another example, where the bureau auctions off recovered, seized, or unclaimed items or property of all kinds.

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