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A Dutch auction is one of several similar types of auctions for buying or selling goods. Most commonly, it means an auction in which the auctioneer starts with a high opening price and lowers it until someone accepts it or it reaches a set reserve price. This type of price auction is most commonly used for goods that must be sold quickly, such as flowers, fresh produce, or tobacco. A Dutch auction has also been called a clock auction or open-outcry descending-price auction. This type of auction shows the advantage of speed since a sale never requires more than one bid. It is strategically similar to a first-price sealed-bid auction.

How a classic Dutch auction works

Start high: The auction begins with a high price for the item.

Price drops: The auctioneer or a mechanism gradually lowers the price in increments.

First bid wins: The first bidder to accept the current price wins the item, and the auction ends.

Example: A seller might start a car at $15,000. If no one bids, they might lower it to $14,000, and so on. A buyer who accepts at $10,000 would win the car for that price.

How a financial Dutch auction works

Bidding period:

A company or government offers items (like stocks or treasury bonds) for sale.

Bids are submitted:

Bidders submit sealed bids specifying the quantity and price they are willing to pay.

Clearing price is set:

The seller then determines the highest price at which all of the available items can be sold, called the clearing price.

Uniform price for all winners:

All winning bidders receive the items at this single, uniform price, even if they bid higher.

Example:

If a company offers 400 shares and receives bids for 100 shares at $300, 100 shares at $200, and 200 shares at $150, all 400 shares would be sold at $150 each.

Key advantages

For sellers:

Dutch auctions can be efficient for selling large quantities of identical items or for determining the market price for securities.

For buyers:

They can democratize access to IPOs, allowing smaller investors to participate, and prevent overpaying by making all winning bidders pay the same price.