Single-Price Auction

A Single-Price Auction (often called a Dutch Auction in the context of share buybacks and U.S. government bond sales) is a market method for selling assets where all successful bidders pay the same price. Imagine a company wants to sell 1,000 shares. Potential buyers submit secret bids, stating how many shares they want and the maximum price they are willing to pay per share. The auctioneer then arranges these bids from the highest price to the lowest. Starting with the highest bidder, shares are allocated down the list until all 1,000 shares are assigned. The magic happens next: the price that everyone pays is the price of the lowest successful bid. This price is known as the clearing price. So, even if you bid $50, but the lowest successful bid was $45, you only pay $45 per share. This method stands in contrast to a multiple-price (or discriminatory) auction, where every winner pays the price they actually bid.

The best way to understand a single-price auction is to walk through one. Let's say Capipedia Inc. is going public through an Initial Public Offering (IPO) and is selling 1,000 shares. The bids come in as follows:

• Bidder A: Wants 400 shares at a maximum price of $10.50
• Bidder B: Wants 500 shares at a maximum price of $10.25
• Bidder C: Wants 300 shares at a maximum price of $10.00
• Bidder D: Wants 200 shares at a maximum price of $9.75

Here’s how the auctioneer allocates the 1,000 shares:

1. Step 1: Start with the highest bid. Bidder A gets all 400 shares requested. (Shares remaining to be sold: 1,000 - 400 = 600)
2. Step 2: Move to the next highest bid. Bidder B gets all 500 shares requested. (Shares remaining to be sold: 600 - 500 = 100)
3. Step 3: Move to the next highest bid. Bidder C requested 300 shares, but only 100 are left. Bidder C gets the remaining 100 shares. (Shares remaining: 0)
4. Step 4: The auction is complete. Bidder D, with the lowest bid, gets no shares.

The lowest successful bid was Bidder C's price of $10.00. This becomes the clearing price for the entire auction. The result? Bidders A, B, and C are all successful. And despite bidding $10.50 and $10.25 respectively, Bidders A and B join Bidder C in paying only $10.00 per share.

This auction style isn't just a technical curiosity; it has real-world implications for investors focused on paying a sensible price.

In a typical auction, the winner is often the person who most overestimates an item's value—a phenomenon known as the winner's curse. The single-price auction helps mitigate this. Because you know you'll only pay the clearing price, you are incentivized to bid the true maximum price you believe the asset is worth. You don't have to worry about massively overpaying relative to everyone else. This aligns perfectly with the value investing discipline of determining an asset's intrinsic value and refusing to get swept up in speculative frenzy.

• U.S. Government Bonds: The U.S. Treasury uses the single-price auction method to sell its debt, including Treasury Bills (T-Bills), Treasury Notes (T-Notes), and Treasury Bonds (T-Bonds). This creates a deep and fair market, and understanding the process is key for investors buying directly from the government.
• IPOs: While less common than traditional IPOs, some companies like Google (now Alphabet) famously used a Dutch auction for their public debut. It can lead to a more democratic and rational initial pricing of a company's stock.
• Corporate Share Buybacks: A company wanting to repurchase its own stock may use a Dutch auction. It announces a price range, and shareholders can “tender” (offer to sell) their shares at a specific price within that range. The company then finds the single lowest price that allows it to buy back its target number of shares.

• Fair and Transparent: All winning bidders pay the same price.
• Better Price Discovery: It encourages bidders to submit bids closer to their true valuation, providing a more accurate reflection of market demand.
• Simplicity for Bidders: Reduces the complex game theory of trying to guess what others will bid just to secure a win.

• Lower Revenue for the Seller: The seller misses out on the higher prices that more enthusiastic bidders were willing to pay.
• Risk of Bidding Too Low: You might miss out entirely if your bid falls below the final clearing price.
• Potential for Collusion: In theory, a group of large bidders could coordinate to keep bids artificially low, though this is highly regulated and difficult to execute in major public markets.