An Auction is a process of accepting bids through which a right, commodity or security is sold to the highest bidder.
Auctions are held to sell everything ranging from antiques to financial securities.
We encounter terms like Uniform Price Auction or Multiple Price Auction, generally, when it comes to the auction of a right or security.
In this post we will try to understand the difference between uniform price and multiple price auction methods.
But, we must first understand the meaning of the term “cut-off price“
Cut off price is the minimum price for acceptance of bids as determined in an auction. Thus, all bids received below the cut off price is rejected.
In case of uniform price auction, all successful competitive bids (i.e bids higher than the cut-off) will be accepted at the cut-off price, determined at the auction, irrespective of bid prices tendered by the bidder.
In case of multiple price auction, successful competitive bids will be accepted at the bid prices tendered by the individual bidders at the auction.
Competitive bids at offer prices lower than the ‘cut off’ price will be rejected in the case of both uniform and multiple price auctions
Let us try and understand this with the help of an example.
Let us assume that for a sale of securities of the maximum size of Rs. 100 Million, the following bids were received. Price range for each security is Rs. 100 to Rs. 120
| Bidder | Bid Price (Rs) | No. of security | Bid Amount (Rs Million) | Cumulative Bid Amount (Rs Million) |
| A | Rs 120 | 250,000 | 30 | 30 |
| B | Rs 115 | 250,000 | 28.75 | 58.75 |
| C | Rs 110 | 375,000 | 41.25 | 100 |
| D | Rs 100 | 500,000 | 50 | 150 |
In the auction the cut-off price was determined at Rs. 110.
Thus bids offered by A, B, C (which is higher than the cut-off price) was accepted, while, D’s bid was rejected.
In the case of the ‘Uniform Price’ auction, each successful bidder will be allotted security that he bid for at Rs. 110 each; irrespective of bid prices individually quoted. Thus the total amount payable will be (875000 securities @ Rs. 110 per share) Rs. 96.25 Million
Whereas in the case of Multiple Price Auction, each successful bidder will be allotted securities at the bid price he had offered. Thus the total amount payable would be Rs. 100 Million.
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