CANDLE AUCTION Meaning and
Definition
-
A candle auction is a type of auction where participants bid for an item by extinguishing a candle at their desired price point. Also known as "dutch auction" or "descending price auction," it operates in a reverse manner compared to traditional auctions. The auctioneer begins by lighting a candle and announcing the starting price. Interested bidders then compete in an effort to outbid each other, with the goal of being the last bidder to extinguish the candle before it goes out.
As the auction progresses, the candle burns down at a predetermined rate, typically divided into equal time intervals. The price simultaneously decreases during each interval. Bidders must closely monitor the dwindling time and price to strategically decide when to extinguish the candle. Once a bidder is satisfied with the current price, they extinguish the candle, indicating their acceptance of the final bid price.
Candle auctions are often used in financial markets, especially in government bond auctions. They have the advantage of transparency, allowing all participants to witness the bidding activity, ensuring a fair and accurate pricing process. This type of auction promotes efficiency and can achieve price discovery, where market participants contribute to establishing the true value of an item. The candle auction format suits situations where the auctioneer seeks to maximize participation and achieve optimum pricing.
