Uniform price auction

Commodity Auctions: A uniform price auction otherwise known as a "Clearing Price Auction" is a multi-unit auction in which a fixed number of identical units of a homogenous commodity are sold for the same price.

Each bidder in the auction bids a price for a quantity, typically only a part of the total quantity being offered for sale. The bids are considered to be the maximum price that each bidder is willing to pay per unit, and the quantity is the number of units they wish to purchase at that price. These bids are sealed - not revealed to the other buyers (a closed envelope style auction).

At the auction close the auctioneer will look to the highest bid and ask himself whether the total quantity of units on offer may be sold at that price. Since bidders usually only bid for a part of the quantity of units on offer, unless multiple bidders had all bid the same highest price, it is not usually the highest bid price at which the total quantity of units on offer may be sold. Consequently, the auctioneer will then look to the second highest bid and ask himself whether at that price there is sufficient demand to clear the total quantity of units on offer for sale. And so on and so forth. The auctioneer repeats this iterative process and as the price reduces so the quantity of units being demanded at that price increases. The auctioneer works his way lower and lower down a demand pyramid (quantity demanded increases as price decreases creating a pyramid shape distribution of demand at each price increment) until a price is discovered at which the total quantity of units on offer may be sold. This price then becomes the unit "clearing price" or the "uniform price", hence the name of this type of auction. The unit clearing price is the deemed level at which supply may be said to meet demand for the quantity of units on offer. Successful bidders are those that had bid at the unit clearing price of above. All successful bidders pay the same unit clearing price. Priority is given to the highest bidder first, giving them the number of units requested, then the second highest bidder and so forth until the supply of the commodity is exhausted. The result is that those that bid a price above the unit clearing price typically receive the total quantity of units sought while the last bidder at the unit clearing price will only receive the residual balance of units available and so will usually not receive all of the units that it sought to acquire in the auction. The price is thus established at the optimal level needed to clear the entire quantity of units being sold, hence the name "clearing price auction".

A Uniform Price Auction may be utilised to aggregate a quantity of units offered by more than one seller to multiple buyers. This style of auction, sometimes referred to as a Double Auction shares the characteristics of an open market mechanism in which all buyers and all sellers interested in trading a homogenous commodity may participate simultaneously. The clearing price mechanism is often utilised in a market context in order to establish a benchmark price index for that market in question. Examples include government bond auctions, energy market auctions and compliance certificate markets such as the Carbon Emissions Trading Scheme.

Double auction

Opponents of this type of auction argue that the uniform-price auction does not result in bidders bidding their true valuations as they do in a second-price auction unless each bidder has demand for only a single unit. Instead, bidders shade their bids for units other than their first because those bids may influence the price the bidder pays. Ultimately, they argue, this demand reduction results in an inefficient equilibrium.

However, supporters of this type of auction argue to the contrary. They state that bidding inhibitions are removed by the introduction of a Uniform Price since no bidder will fear overpaying as a result of bidding too strongly. The same principle is applied to great affect in a Vickrey Auction. The result, they argue, is the procurement of agressive bidding that yields an efficient price at the supply and demand equilibrium for the quantity of units being sold.

• The Emanuel Uniform Price Auction evolves this principle one stage further in order to achieve a greater level of efficiency in the discovery of the uniform price and typically yields a higher clearing price than a standard Uniform Price Auction. The Emanuel Uniform Price Auction methodoloty involves the determination of whether or not each bidder would accept a larger quantity of units if the Uniform Price is established below the bid that it had placed provided always that the aggregate cost that will be paid by the bidder remains the same - (so a bidder placing a bid for 5 units at a price of $2 may also be happy to acquire 10 units if the Uniform Price is established at $1 since the aggregate cost remains at $10 for the bidder). The effect of this variation is that the demand pyramid is broadened. This methodology achieves an even more efficient price equilibrium based on a more accurate snapshot of supply and demand at each price increment. This system was developed by the celebrated commodity broker and auction specialist James Emanuel and first deployed to great effect on 2 October 2008 when auctioning United Nations Certified Emission Reductions in the Kyoto Protocol derived carbon emissions market.

The benefits of the Emanuel Uniform Price Auction variation

One example of a standard uniform price auction was the initial public offering of Google stock in 2004.^{[citation needed]}

Further reading

For a technical analysis of this type of auction see Krishna, Vijay (2002). Auction theory. San Diego: Academic Press. p. 169. ISBN 978-0-12-426297-3. .

See also

• Discriminatory price auction