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Dutch Auction – Definition & Explanation

Cite this article as:"Dutch Auction – Definition & Explanation," in The Business Professor, updated January 17, 2020, last accessed September 23, 2020, https://thebusinessprofessor.com/lesson/dutch-auction-explained/.

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Dutch Auction Definition & Explanation

A Simple Dutch Auction is an auction process where the auctioneer or seller starts with a high asking price and then lowers it incrementally or in stages until there is a bid for the item (or batch being sold). At this point, the auction ends and the item is sold.

When there is more than one identical item being sold separately or not as a lot. Bidders will publicly indicate the amount they are will to pay for any item (and the number of items they will purchase at that price). If there are insufficient bids to sell all of the items, the price is lowered further.  The auction ends when there are enough bids (or purchasers at a given price) to sell the entire quantity offered for sale. If, at a given price, there are more bids than there are items available, priority is generally given to those who enter their bids first. Everyone pays the same price for the items purchased. This method generally used when setting the price for shares being sold in an initial public offering, for shareholder-initiated tender offers, and sale of US Treasuries.

  • Note: There are variations of the Dutch Auction which incorrectly employ the name “Dutch Auction”. A common type of auction confused with the Dutch auction is the Second-Price, Sealed-Bid Auction, also known as the Vickrey Auction.

Example of a Dutch Auction

Let’s assume there are 10 shares of stock for sale. A bidder offers $10 per share of stock for 8 shares. The next highest bidder offers $9 per share for 10 shares. The auction will end, as there are adequate bids to sell all shares. The price paid for all shares will be the lowest successful bid of $9. The first bidder will receive 8 shares at a price of $9 (lower than her original $10 bid). The second bidder will receive the 2 remaining shares (less than her desired lot of 10 shares) at $9.

Academic Research on Dutch Auctions

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