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# Auction Design Guide
#### A Simple Pattern Language for Auctions
###### tags: `article / in process` musing

The follow is a design guide for auctions, presenting by listing the design patterns found in common auctions and auction games (and extrapolated from the game).

## Auction Overview

An auction usually has the following characteristics:

1. Participants bid against each other to secure a resource.
2. Some sort of monetary marker is exchanged for the resource, not another resource.
3. Rigid rules are laid out for making bids and changing prices.
4. The price either increases or decreases over time.
5. Ultimately, the best price is taken following the end of the auction period.

An auction might perhaps omit one of these characteristics, but typically it will have all five.

In addition, the following things tend to be true for auctions and create some of their dynamism:

6. Resources available for auction tend to have different values to different participants.
7. Participants tend to have different amounts of monetary markers.

## A Simple Auction

The simplest form of an auction works something like this:

> A resource is offered up for bidding. Participants shout out bids, each higher than the last, and each recognized by an auctioneer as it is accepted. Eventually, no one makes a higher bid, and the auctioneer acknowledges the final bidder as the winner. That bidder pays out his bid and wins the resource; no one else spends their money.

This is the typical auction found at most auction houses where interested parties sit in uncomfortable chairs and hold up numbers whenever they want to bid on an item.

An auction like this can work fine, but what we would call an "unconstrained, open, freeform-bidding English auction with a single winner and a winning payer" is just one way to manage auctions. Changing up any of those elements can introduce different incentives to the auction, resulting in different results, and can allow for the auctioning of different resources.

Generally, six different elements can be mixed and matched to define an auction: bid timing methods, bid display methods, bid making methods, bid winner methods, bid payment methods, and bid limitations.

## Bid Timing Methods

The first question in any auction is: _how are the participants' bids organized?_

**Freeform Bidding:** Bidding is totally freeform, with anyone able to offer a bid at any time, and bidding continues until no one has offered a bid in sufficient time. This is the default auction-house method. It is typically used with English auctions (see _Bid Making_) where it requires an auctioneer, who can try and drive up prices and determine when bidding is "done". However it can also be used with Dutch auctions (see _Bid Making_), which have a decreasing price. If the price is decreasing monotonically, a bidder simply indicates when they are ready to pay a price.

**Simultaneous One-Time Bidding:** Everyone gets to make only one bid, and all the bids are revealed simultaneously. This goes hand in hand with Blind Bidding (see _Bid Display_), where bids are written down or perhaps even held out in a closed fist. In cases of ties, some method is required to determine the winner, such as assessing a set identifier (such as auction number) or a historic reference (such as who won an auction least recently). Alternatively, _Simultaneous Multiple Bidding_ may be used to resolve ties.

**Simultaneous Multiple Bidding:** As with _Simultaneous One-Time Bidding_, but multiple bidding rounds are possible if the first one ends in a tie. Additional bidding rounds might include only the winning bidders or they might include all of the original participants. For bids involving only the winning bidders, they might be in the original currency or some new currency that will be paid on top of the original bid.

**Turn-based One-Time Bidding:** Everyone gets to make only one bid, but bidding is done one at a time, in a specific order. This most frequently occurs in auction-based games, but participants in any environment could be given a bidding order. This offers some interesting dynamics because participants early in the bidding process have limited information while players late in the bidding process have complete information. Who bids first has to rotate across different auctions for this to be a "fair" method — but perhaps unfairness is desired, in which case the participants who are to be disadvantaged are put at the front of the order and those who are to be advantaged are put at the back.

**Turn-based Continuous Bidding:** Everyone gets to continue bidding in the bidding order one at a time. After passing, bidders may either be out for good, or able to continue bidding on later times around. Bidding continues until everyone but one player has passed. This maintains the ordering of _Turn-Based Bidding_ but without the first-bidder disadvantage of _One-Time Bidding. It would only be used over something such as _Freeform Bidding_ if there were a strong need for order of if participants needed to reflect upon other bids before making their own.

## Bid Display Methods

The question here is: _how do participants display their bids?_

There are two common choices.

**Open Bids:** All bids are seen by all players during the bidding process. Most auctions work this way.

**Blind Bids:** Bids are all revealed simultaneously, which means that the Bid Timing Method must be one of the _Simultaneous_ options.

Other possibilities include:

**Partial Blind Bids:** Only some aspect of the bid is known to other participants, such as what currency was used, whether it was an all-cash offer, etc. In real-estate bidding (which isn't technically an auction, since the high bid doesn't have to be taken), an agent will often hint at the number of bidders as partial information.

**Totally Blind Bids:** An impartial arbiter looks over all blind bids and then awards a winner, but the bidders never know how much their opponents bid, just who won.

## Bid Making Methods

The question here is: _how do participants make their bids and how do they change over time?_

**Unconstrained English Auctions:** In this type of auction, bids slowly increase, but at a speed set entirely by the participants. They may make minimalistic increases or else may make large jump bids to try and quickly end an auction and stun opponents into submission. Again, this is the common auction-house method.

**Constrained English Auctions:** In this type of auction, bids must instead fit certain criteria. Perhaps bid increases must always be in certain minimum or regular units, such as bids always increasing by $5 (or $100). Perhaps those minimum units increase the higher the bid is. An entirely constrained system might use a geometric progression such as: $0, $1, $3, $6, $10, $15, $21, $28, $36. More simply, bids could always be required to increase by 2% (or 10%). Participants can usually jump-bid if they wish, but the constraints mark minimum increases that they must meet at each level.

**Constrained Dutch Auctions:** Here, no one is bidding. Rather, an item has a price which is slowly decreased until someone decides to purchase it. The first bidder who does so is the "winner". These auctions are constrained because price drops tend to follow a pre-set formula over a pre-set time period. For example, a price might drop by $1 (or $5 or $100) every second (or 5 seconds or 15 seconds).

**Incremental Dutch Auctions:** Instead of decreasing the price, Dutch auctions can instead increase the value of the item until someone purchases it for a set price. This sort of auction would be rare if a currency were being used for purchases, but would be more useful if purchases were being made with a set-value token: if each participant came into an auction with two purchase-tokens, they would hold a token until an item had increased in value enough for them to use it. Those value increases might be additional copies of the item or even a currency rebate.

**Set-Value Auctions:** The auctioneer sets a single price for an item that does not change and the first person to agree to that price wins the item. Note that this auction style might not be as simple as it seems based on _Bid Timing_. In a _Freeform Bidding_ situation, the first interested party gets the item, but in _Turn-Based One-Time Bidding_ it goes to the interested person who gets the first bid (reversing the usual advantages and disadvantages of that sort of auction).

## Bid Winner Methods

For auctions where there is only one winning result, there is only one common choice to see who wins:

**Single Winner:** Whomever bids the highest wins.

(Though obviously there could be variants where the low bidder wins or the second-highest bidder wins, or whatever, but they'd require very specific purposes.)

There are also possibilties for multiple winners. The first three possibilities cover the situation where multiple, identical items are available for purchase. (Most properly this is a _lot auction_ or a _multiple item auction_, but auctioning multiple items is sometimes incorrectly called a _Dutch Auction_.)

**Multiple Identical Winners:** Some auctions, typically those with _Simultaneous_ timing, may allow multiple winners if they all bid the same price. In this case they all get the resources for their bid. This could require an unlimited supply of the resource, but alternatively _Multiple Identical Winners_ might be allowed only if there is sufficient of the item to accomodate all winners.

**Multiple Lowest-Cost Winners:** Bids are taken via a normal method--most frequently _One-Time Simultaneous_ and _Blind Bidding_--and then all the items are sold at the lowest successful price (e.g., the lowest price for someone who should have gotten an item, based on quanity). For example, if there were five bids for a resource, $2, $5, $7, $8, and $15, and there were two of the item available, both the top and second bidder would get the item at $8. This is the auction method type that eBay erroneously calls Dutch Auctions at one point. It's also very similar to the "Vickrey Auction", but there the highest losing bid is used as the price, rather than the lowest winning bid.

**Multiple At-Cost Winners:** Exactly as the _Multiple Lowest-Cost Winners_, but each winner pays what they bid until supply runs out rather than all of them paying the lowest price. This is often used for refinancing credit in the financial world, despite issues of collusion.

The last winner possibility relates to a case where multiple, similar but not identical items are available for sale:

**Multiple Variable Winners:** You might not have multiple identical goods, but rather have multiple similar goods, where some are clearly better than others. Here, you can have multiple winners who each gain a different value of item, depending on their bid value, with the best bidder getting the best item, the second best the second, etc. There probably needs to be an ability for a "winner" to decline an item that's not wanted, passing it down to the next winner.

Finally, there's possibilities for other outcomes than simple winning:

**Discrete Results:** Some auctions may have discrete results, somewhat separate from the auction itself, most commonly based on the total amount of money bid. Bonus items might become available to winners (or to all bidders!) if sufficient money is bid. Or some event might happen, such as the release of additional resources for auction. These discrete results might be negative, such as banning the high bidder (for an auction or even for an entire series of auctions) from a follow-up event.

## Bid Payment Methods

Related is the question: _who pays in an auction?_

**Winning Payer:** Most commonly, only the bidders who actually "won" have to pay. This might be a single winner or multiple identical winners. It's how almost all auctions work.

**All Payer:** This alternative is that everyone has to pay what they bid, _even if they lose_. Clearly, this would not be acceptable for most auctions, but there might be unusual cases, such as charity auctions, where it's an acceptable rule. It might be particularly acceptable if all winners get _something_, even if it's not the winning item, but is less likely to work in cases where losers really get nothing.

## Bid Limitations

Although an auction can be entirely defined by the above five elements, optional limitations can dramatically change how they play out. However, they must be approached with real care, because they have the potential to totally kick the bottom out of your auction system if they result in too few people bidding.

**Victory Limitations:** Most frequently, each participant is only allowed to win one auction over a specific time period, effectively meaning they can't bid once they've won.

**Bidding Limitations:** Participants aren't allowed to bid unless they meet certain criteria--often having won a certain type of past auction or generally owning some token.

**Monetary Limitations:** Participants are only allowed to bid if they have the right sort of currency.

**Reserve Limitations:** After bidding is concluded, no one wins if they final bid did not meet a secret reserve price. This is a common mechanism on eBay.

**Uniqueness Limitations:** Some pseudo-auction systems don't actually require bidders to bid better than previous bidders; instead each bidder need only bid differently, then each of the _Multiple Winners_ gets an appropriate victory result.

## Gaming Examples

Eurogames heavily used auctions as a game mechanic from about 1995-2010. As such, they offer great examples of how far auctions can be stretched.

**Amun-Re (2003).** This Reiner Knizia auction game has two distinct auctions. In the first, players auction to purchase lands on the Nile. In the second, players bid for Amun-Re's favor.

The land auction is a fairly simple constrained English auction with open turn-based continuous bids. Its most interesting element is that a variety of items are simultaneously available for auction, but players only can bid on one at a time: each player, one at a time, puts their bid on a certain land, at a certain level. There are both bidding and victory limitations. Once you've bid on a land, you must jump to another land if you're overbid; since you only have one bidding marker, by the end of the bidding each player will only be allowed a single victory. There's a first payer, single winner for each land.

The favor auction is an unconstrained English auction with simultaneous one-time blind bids. Each player simultaneously puts a bid into their hand, and they're all revealed at once. This is an all-payer, multiple at-cost winners auction, where everyone puts out their money, and the first-place winner(s) get the best results, the second place the second-best results, and everyone else the third-best results. There is also a discrete result: the total valuation of the bid determines how productive all of the lands are that turn.

**Queen's Necklace (2003):** This game also has two distinct auctions. In the first, players bid for gems, and in the second players try and sell the jewelery made of those gems.

The gem auction is a constrained Dutch auction with open turn-based continuous bids. On his turn, each player see a set of 5 cards available for his purchase with a set amount of money (10 ducats a turn). He takes his turn and buys any items he wishes, then the prices all decrease for the next player and new items appear to replace the items the previous player bought, each valued at their top price. There is a first payer, single winner for each auction, with no particular limitations.

The jewel auction is an unconstrained English auction with simultaneous one-time blind bids. Each player secretly chooses a number of each gem that he will offer for sale. Victory is determined as all-payer, multiple identical winners with discrete results. Everyone expends all the gems they bid, but only the players tied for the top values actually sell their gems, and that price can be decreased or increased by the total number of gems of that type sold. Note that this is effectively a seller's auction rather than the more typical buyer's auctions: the players are exchanging goods for money rather than money for goods.

## Other Auction Mechanics

One of the interesting things about auctions is that the core mechanic of participants bidding increasing values for a resource is actually at the foundation of several mechanics typically found in games. These gaming mechanics could in turn be considered and analyzed to create very different real-world auctions.

**Trick-Taking Games.** In trick-taking games, players bid cards, with the highest bid usually winning a trick. The cards are a set-value token that players are given, and they're played in a very constrained way (usually one per trick, usually following suit).

**Conflict Games.** In conflict games, players push armies at each other, and the biggest pile of armies tends to win. The armies are a currency and they're winning territories on a board. Interesting elements include the fact that auctions can be forced (by advancing troops) and that the currency that a player can use is constrained by geographic location.

**Major-Control Games.** In majority-control games, players station units in spaces in an attempt to have the most units in a space and win its rewards. This is really an alternative type of conflict that originated in Germany when it was particularly conflict adverse ... but then all auctions are conflicts of different sorts. Among the interesting elements is that majority-control games tend to simulataneously run a whole series of auctions, and again the currencies being used are geographically constrained.

More on these possibilities can be found in our game-design article, ["The Auction Grand Unification Theory"](https://www.skotos.net/articles/TTnT_/TTnT_161.phtml.html).

Although real-world auctions aren't games, these very different ways of looking at auctions can offer new perspectives on how to design them.

## Conclusion

Auctions are like any other type of mechanical design: you must know what your goal is and what your environment is, and based on those inputs you can try and create a specific mechanic which best reaches those desires. The puzzle pieces included in this article, drawn from a variety of real-life auctions and auction games, may help you get there.