An auction is the course of buying and selling of goods and services by presenting them for a proposition, taking propositions, and latter vending the item to the highest bidder. The process of auction has a long history tracing their origin back to the 500 BC where beautiful women were held for auctions. In the 18th century, actions by candle began to be applied for the sale of goods with the auction coming to an end when the candle flame is blown out. In the contemporary world, however, the auctions have progressed to the point where it is done over the internet from a wide range of buyers resulting to increased revenues from the industry.
All pay auctions refer to the auctions whereby all the bidders ought to pay notwithstanding whether they won or lost in the process of bidding. While the highest bidder wins and takes the entire prize. The process is more pertinent in academic endeavors in addition to their applicability in political contributions as well as competitions. In an all pay auction, the Nash Equilibrium is held in a manner that the bidder plays a mixed strategy making his/her expected pay-off be zero. That implies that the seller’s expected revenues are equated to the value of the prizes that were offered (Klose & Kovenock, 2011). Nevertheless, its applications have revealed that chances of over bidding are common. It is a situation whereby the seller’s profits and returns in most cases surpass the value of the prize. Equally, there are situations whereby winning bidders are recorded to have registered losses in the long run. The most common forms of all pay auctions are the Tullock auction also termed as a Tullock lottery. It is an auction that allows all the participants to state their bid, but all those that lose as well as the winners contribute the submitted bids.
Worth noting as well is the fact that an auction exists in various forms with the English and Dutch auction methods being the most famous ones. The English auction is also termed as an open ascending price auction while the Dutch was as well termed as the open descending price auction. In the open ascending auction, it was held to be the most common, and it is to the modern times (Klose & Kovenock, 2011). It is whereby those taking part in the bidding process openly bid with the succeeding or subsequent bid expected to be higher than the initial bid. This process may happen in various forms, for instance, an auctioneer may call out the prices or the bidders themselves call and state the prices. At the same time, the process allows for a proxy call out on their sake while the bids are electronically displayed to the public.
The open descending is the additional auction and it is also known as the Dutch auction as elaborated exceedingly. Unlike the ascending auction, this begins the bidding process by stating the price for some quantity of similar items as the price starts to be lowered. The price goes on decreasing until the point where the auctioneer’s prices for the quality of goods are attained. Additionally, it differs with the English auction in that various identical goods are allowed to be displayed for bidding at the same time (Klose & Kovenock, 2011). However, the identical goods allocated as per the order. That implies that the highest bidder will be allowed to select their items first then followed the next winner.
Klose Bettina, & Kovenock Dan, (2011). The All Pay Auction with Completer Information and Identity-Dependent Exterlities. Retrieved on 17th May 2014: From http://www.ua.es/personal/jose.alcalde/Kovenock.pdf