Bidding Behavior in Dutch Auctions: Insights from a Structured Literature Review

ABSTRACT

The Dutch auction, also known as the descending-price auction or reverse clock auction, has a long-standing history in practice and in academic literature. In practice, the Dutch auction is commonly used to rapidly sell large quantities of homogeneous goods, such as cut flowers, fish, or tobacco. However, most e-commerce auction sites focus on other auction mechanisms, and overall research on human behavior in Dutch auctions is scant. To facilitate research on Dutch auctions and their applications in electronic commerce, we conduct a structured literature review of experimental studies and establish the current state of research on bidding behavior in single-unit and multi-unit Dutch auctions. The findings are based on an analysis of twenty-nine articles published in the fields of economics, information management, marketing, and operations research and management science between 1970 and 2016. This review reveals (1) the characteristics that make the Dutch auction unique compared to other auction formats, (2) the drivers of bidding behavior in Dutch auctions, and (3) an overview of how Dutch auctions can be employed in practice and to what advantage. Finally, we identify directions for future research on bidding behavior in Dutch auctions.

KEY WORDS AND PHRASES:

• Auction bidding
• descending price auctions
• Dutch auction
• literature review
• online auctions

Acknowledgments

The authors thank Daniel Conway, Paul Garrett, and Anuja Hariharan for their valuable feedback on an earlier version of this study. Moreover, they thank Pascal Y. Dorn for his untiring help in carrying out the literature search.

Notes

^1. In his well-known historical sketch of auctions, Cassady noted that a similar auction mechanism, referred to as “mineing,” was used in England in the seventeenth century [22]. In this mechanism, which was “undoubtedly imported from Holland” [22, p. 32], the auctioneer reduced the price until one of the bidders shouted “Mine!”

^2. In an English auction, the auctioneer successively raises the price until only one bidder remains in the auction. In an FPSB auction, each bidder submits a single sealed bid. The bidder who places the highest bid wins the auction and pays the amount of his or her bid. The SPSB operates similarly to the FPSB auction. However, the winning bidder does not pay the amount of his or her own bid but the amount of the second-highest bid [60, 77].

^3. The list of Recommended IS Conferences includes the following generic conferences: Australasian Conference on Information Systems, Americas Conference on Information Systems, European Conference on Information Systems, Hawaii International Conference on System Sciences, International Conference on Information Systems, International Conference on Information Systems Development, and Pacific Asia Conference on Information Systems [3].

^4. In Dutch and FPSB auctions, bidders need to reflect the strategic risk of losing the auction and its impact on the expected profit when shading their bids, resulting in bids above the RNNE for risk-averse bidders. In contrast, risk aversion does not affect the weakly dominant strategy to bid a bidder’s own valuation ($b\left(v\right)=v$) in English and SPSB auctions [70]. Hence, when assuming risk-averse bidders, a seller would expect higher revenues in Dutch and FPSB auctions compared to English and SPSB auctions.

^5. In addition, Cox and James [26] considered clock/tree and simultaneous/sequential variations of a centipede game, where players know the other player’s exact payoff information, a feature that distinguishes this game from the Dutch auction. In a centipede game, a player has to decide when to take a payoff that is growing over time before another player does, in which case the former player receives a zero payoff. The authors observed similar effects to those in the Dutch auction, in that tree and sequential variations exhibit later takes and hence higher payoffs.

^6. The perhaps best-known example for auctions of goods with synergy effects are spectrum license auctions in the telecommunication domain. Here, for technical and marketing reasons, it is advantageous to own licenses for adjacent geographical regions and/or for adjacent frequencies [49].

^7. The rapid nature of the Dutch auction mechanism is also emphasized on the websites of market platforms. For instance, the auctioneers at the Auckland Fish Market in New Zealand state that they use the Dutch clock auction because it is “a system aimed at quick sale of product at competitive premium prices” (https://www.afm.co.nz/#wholesale-slider [accessed May 9, 2016]). The Sydney Fish Market in Australia notes: “Two clocks auction seafood simultaneously to ensure product is sold quickly” (http://www.sydneyfishmarket.com.au/seafood-trading/auction-system [accessed August 23, 2016]). In these two markets, the clock starts at about $2.00 AU/NZ above the price that the product is expected to receive, and then drops in the usual Dutch auction fashion in time intervals of ten seconds.

^8. A notable variation can be observed at the fish market in Taiwan, where the auctioneer announces a fixed price for a transaction and then successively increases the amount of fish the winning bidder will receive for that price [30]. Hence, the amount paid per fish decreases over time but the quantity increases. Deck and Wilson [34] experimentally compared this format to the standard Dutch auction mechanism and found no differences in terms of efficiency.

Additional information

Notes on contributors

Marc T.P. Adam

MARC T.P. ADAM ([email protected]; corresponding author) is a senior lecturer in computing information technology at the University of Newcastle, Australia. He investigates the interplay of cognitive and affective processes of human users in electronic commerce. He received an undergraduate degree in computer science from the University of Applied Sciences Würzburg, Germany, and a Ph.D. in economics of information systems from the Karlsruhe Institute of Technology, Germany. His research has been published in top international outlets such as International Journal of Electronic Commerce, Journal of Management Information Systems, Journal of the Association for Information Systems, Journal of Retailing, Economics Letters, and others.

Ami Eidels

AMI EIDELS ([email protected]) is a senior lecturer in psychology at the University of Newcastle, Australia. He investigates human perception and attention, and human information-processing models. His research has been published in top international outlets such as Cognition, Experimental Psychology, Judgment and Decision Making, Journal of Mathematical Psychology, and PLoS ONE.

Ewa Lux

EWA LUX ([email protected]) is a Ph.D. candidate at the Institute of Information Systems and Marketing, Karlsruhe Institute of Technology in Germany. She received a master’s degree in information engineering and management from the Karlsruhe Institute of Technology. Her research interest centers on emotional processes in economic decision making in electronic markets. Her research has been published in international outlets such as Journal of the Association for Information Systems, Economics Letters, and Frontiers of Computer Science.

Timm Teubner

TIMM TEUBNER ([email protected]) is an assistant professor of information systems at the Institute of Information Systems and Marketing at Karlsruhe Institute of Technology. He received his doctoral degree in political science. His current interests include various aspects of peer-to-peer market platforms such as user representation and trust, and the economic value of information systems. His research has been published in international outlets such as Journal of the Association for Information Systems, Business and Information Systems Engineering, Economics Letters, and Electronic Markets.