Auctions have become a foundational part of our economy and our society, serving as one of the primary mechanisms by which rights and resources are distributed. Auctions are everywhere, and quietly taking place by the millions, all the time, all around the world. There’s a reason why they’re so common. If you have a good sense of how much an item you want to sell is worth, and a clear idea of the type of buyers who might be interested in purchasing it, a simple list-price sale makes sense.

Auctioneers are typically looking to maximize the revenues they receive for their goods. Revenue maximization, however, is just one potential outcome for which auctions can be optimized. Another is efficiency, or social welfare, which is maximized when the winning bidder for a given item is the bidder with the highest valuation for that item. Perhaps surprisingly, these two objectives are not always aligned — the auction design that offers the greatest profits to the seller may not necessarily result in the most efficient allocation, and vice versa. The appropriate auction design for any given market or circumstance may therefore differ depending on whether the objective is to optimize for revenues or social welfare.

Highly sophisticated auctions are sometimes implemented to address unique market circumstances and goals for allocation of auctioned items. Most circumstances, however, don’t require such complex auction design — and in fact, increased complexity ends up being costly to implement, while giving rise to unanticipated incentives and bidder confusion, without providing real advantages for sellers or bidders. In auction design, sometimes simpler is better.

The benefits that all forms of auctions offer to sellers are the following:

Of course, when the conditions under which auctions are run aren’t optimal, auctions may end up no more effective than other market mechanisms. And while auctions are resilient to abuses like front-running, they’re not perfect. They can be impacted by other kinds of abuse, and are also vulnerable to the impact of other extraneous factors that can reduce their efficiency or lower the satisfaction of participants in outcomes.

Want to learn more about the evolution of auctions and the different types of auctions that are common today? Read our in-depth article here.