A dual auction is a sales process where buyers and sellers submit bids and request prices simultaneously, with an auctioneer determining an offset price for the sale. It is also studied by social scientists and economists to understand market behavior. A computer can act as an auctioneer, and open protest auctions can result in prices escalating quickly.
A dual auction is a sales process in which buyers and sellers submit bids and request prices to an auctioneer simultaneously, and that party determines an offset price for the sale. An auctioneer is not always necessary; the open-cry system used in some stock markets is an example of a dual auction, where no one mediates between buyers and sellers. This technique can have variable impacts on prices and take them beyond the break-even point.
In addition to being a sales technique, the double auction is also the subject of intense study. Social scientists, game theorists and economists like to look to this model to learn more about the behavior of buyers and sellers. A deeper understanding of market behaviors can help explain events that appear to be mediated by human activity, such as a sudden rise or fall in prices. With a double action, game theory comes into play in a significant way, as buyers and sellers jostle for the most advantageous position.
When an auctioneer is involved, that person receives all bids, requests prices, and determines the offset price, the bid that will match the greatest number of bids to sell all of the merchandise in question. Buyers who bid at or above this price will pay that price to sellers who bid at or below that price. Sellers who asked for too much will not be enlightened, while buyers who bribed will walk away with nothing.
It is possible for a computer to act as the auctioneer in a dual auction. The computer solves the equation to move the greatest number of goods, given the asked and offered prices. This can sometimes result in a stalemate, where the differential between prices is so significant that the parties cannot reach a happy meeting point in the middle. In this situation, it may be necessary to run the auction again to determine an ask price.
Open protest auctions allow everyone to hear what is being asked and bid. Bidders can raise their bids if they want a better chance of hitting an ask price, and requesters can also raise their ask prices if they feel they are willing to go higher. This can result in prices escalating very quickly as the sides clash before bottoming out and trading activity becomes less robust. Buyers and sellers who are skilled at locating and taking advantage of this ceiling can make a significant profit through the dual-auction sales approach.
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