Legal Definitions - auction

An auction is a public sale where property or services are sold to the highest bidder. The sale is typically finalized when the auctioneer makes a clear announcement, often by striking a gavel, indicating that no further bids will be accepted.

• Example 1: Real Estate Auction

  A family decides to sell their vacation home through an auction. Potential buyers gather, and an auctioneer starts the bidding at a certain price, gradually increasing it as people offer higher amounts. When the auctioneer announces "Sold!" and strikes the gavel after the highest bid, the sale of the house is complete, and the highest bidder is legally obligated to purchase it.

  This illustrates the core concept of an auction: a sale to the highest bidder, with the auctioneer's announcement signifying the completion of the transaction.

• Example 2: Charity Art Auction

  A local charity hosts an art auction to raise funds. Various paintings are displayed, and attendees bid on their favorites. The auctioneer manages the bidding process, encouraging higher offers. For each painting, the person who makes the highest bid before the auctioneer concludes the bidding (e.g., by saying "Going once, going twice, sold!") wins the item.

  This demonstrates an auction in a different context (charity) but with the same fundamental principle of competitive bidding leading to a sale to the highest offer.

Auction Types:

Auction Without Reserve

An auction without reserve is a type of auction where the seller commits to selling the item to the highest bidder, regardless of the price. There is no minimum price that must be met, the seller cannot withdraw the item once bidding has started, and the seller cannot reject any bids or try to outbid other participants.

• Example 1: Estate Sale Auction

  An estate liquidator advertises an "absolute auction" of antique furniture, explicitly stating it will be sold "without reserve." A rare antique desk receives an initial bid of $100. Even if the auctioneer believes the desk is worth much more, and no further bids are made, the desk must be sold to the $100 bidder because the auction was declared "without reserve."

  This shows that in an auction without reserve, the seller is bound to accept the highest bid, no matter how low, once bidding begins.

• Example 2: Online Collectibles Auction

  An online seller lists a vintage comic book on an auction platform, marking it as "no reserve." The bidding starts at $1. After a week, the highest bid is $75. Even if the seller hoped for a higher price, they are legally obligated to sell the comic book to the $75 bidder because it was an auction without reserve.

  This illustrates the seller's commitment in an online context, where the "without reserve" condition means the item will definitely be sold to the top bidder.

Auction With Reserve

An auction with reserve is an auction where the seller sets a minimum price, known as the "reserve price," that must be met or exceeded for the item to be sold. If the highest bid does not reach the reserve price, the seller is not obligated to sell the item.

• Example 1: Luxury Car Auction

  A classic car owner puts their vintage convertible up for auction with a reserve price of $150,000. During the auction, the highest bid reaches $140,000. Since this amount is below the undisclosed reserve price, the auctioneer announces that the reserve has not been met, and the car is not sold.

  This demonstrates that in an auction with reserve, the seller maintains control and is not forced to sell if their minimum acceptable price is not reached.

• Example 2: Farm Equipment Auction

  A farmer auctions off a tractor with a reserve price of $20,000. Bidding is slow, and the highest bid only reaches $18,500. The auctioneer, after consulting with the farmer, declares that the tractor will not be sold today because the reserve price was not met.

  This highlights how the reserve price acts as a safety net for the seller, preventing a sale at an undesirable price.

Dutch Auction

A Dutch auction is a type of auction that can operate in a few different ways, but commonly involves either a descending price format or a method for selling multiple identical items simultaneously.

• Example 1: Flower Market Auction (Descending Price)

  At a wholesale flower market, a large lot of roses is offered. The auctioneer starts with a very high price, say $100 for the lot, and then gradually lowers the price. Buyers indicate they want the lot as soon as the price reaches a level they are willing to pay. The first buyer to accept the current price wins the lot.

  This illustrates the descending price mechanism of a Dutch auction, where the price drops until a buyer accepts it.

• Example 2: Government Bond Auction (Multiple Items)

  A government issues new bonds and uses a Dutch auction to sell them. Investors submit bids indicating how many bonds they want and at what price. The government accepts bids starting from the highest price down, until all bonds are sold. However, all winning bidders pay the *lowest* accepted bid price.

  This shows a Dutch auction where multiple identical items are sold, and all successful bidders pay the same, lowest winning price, ensuring fairness.

Knock-Out Auction

A knock-out auction (also known as a "ring" or "collusive bidding") is an illegal practice where two or more bidders secretly agree not to bid against each other during a public auction. Instead, one person bids on behalf of the group, often at a lower price than would otherwise be achieved. After the public auction, the group then holds a private, secondary auction among themselves for the item, with the difference between the public auction price and the private auction price being shared among the conspirators.

• Example 1: Antique Dealer Collusion

  At a large antique auction, two prominent antique dealers agree beforehand that only one of them will bid on a specific rare vase. The chosen dealer bids a relatively low price, knowing their competitor won't raise the bid. After winning the vase, they then hold a private "knock-out" auction between themselves, where the true market value is revealed, and the profits are split.

  This illustrates a knock-out auction where bidders conspire to suppress the price at the public auction, which is an anti-competitive and often illegal practice.

• Example 2: Property Auction Ring

  Several property developers attend an auction for a desirable plot of land. They form a secret agreement not to bid against each other, allowing one developer to acquire the land at a significantly reduced price. Later, they hold a private auction among themselves for the land, and the profits from the higher private sale are distributed among the group.

  This highlights how a knock-out auction can manipulate the market, depriving the seller of a fair price and is generally prohibited by law due to its anti-competitive nature.