| Definition: | Using an auction pricing system, sellers are not constrained by having to fix a price without knowing what the market will bare (traditional pricing methodology). If a seller sets a price too low, using a classified advertisement for example, the demand will be high and the product will be purchased. The seller, however, will not get the most revenue the market would have paid, if the buyers had had to compete for the purchase. The buyer who wanted the product most (willing to pay the highest price) would not automatically receive the product. Conversely, if the seller advertises too high a price, using a classified adversitement, the product will not sell. By allowing buyers to bid up the price from a low price point, the product will sell to the highest bidder (assuming it clears a minimum asking price). The auction pricing system is a dynamic pricing model, much like the reverse pricing model. Game Theory can impact the strategies involved in setting a starting price (for the seller) and bidding strategies for the buyers.
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