What is an Auction?
An auction is a process of buying and selling goods, assets or products by offering them up for bid, subsequently taking those bids and then selling the underlying item to the party with the highest bid. In regards to general economic theory, an auction refers to any mechanism or market where exchange is initiated through the establishment of a bid-type structure, meaning a good is transferred in a tangible marketplace to the respective individual who bids the highest for the underlying good.
Types of Auctions
There are a number of variations on the basic auction format, including the establishment of time limits, minimum or maximum bid amounts and special rules for determining the actual sales price as well as the winning bidder. In addition to the specific rules relating to auctions and the provisions present, there are a number of different structures of auctions.
For example, a demand auction is where a group of buyers form a market to bid on goods for sale, whereas a supply auction, groups sellers together to offer a good that a specific buyer requests. Furthermore, there are double auctions, where buyers bid to buy goods from sellers and descending (Dutch) or ascending auctions, where the price of the good either increases or decreases in relation to the bids.
What is a Liquidation Auction?
When a business decides to close its doors or an individual declares for bankruptcy the faltering parties may institute a liquidation auction. This format is often undertaken by those entities in a state of financial flux to earn some cash for their goods; the liquidation auction is initiated because the parties would rather make a percentage off their holdings as oppose to holding onto their inventory.
As a result of the seller and the desperation attached to the maneuver, all items in a liquidation auction are sold at a heavily discounted price. The only disadvantage realized by the bidder in a liquidation auction is that there are no warranties or means to collect a refund. As a result, the consumer purchases at his or her own risk in a liquidation auction. Furthermore, as the sale goes on, the items remaining typically decrease in quality.
All liquidation auctions are governed by state and city licenses that require the seller (typically a business) to file an application and submit a list of the inventory. Some businesses will bring additional products to the sale despite the mandate of submitting a pre-approved product inventory list. Furthermore, the city or state will place a limit on how long the liquidation auction will last.
The majority of liquidation auctions are undertaken by businesses so they can close a particular store or location to open a new store. The business will mark down prices heavily to clear inventory in an expedited fashion.