Definition
Auction is a market process where goods or services are sold to the highest bidder. Competitive bidding determines the price, and auctions can be conducted in person, online, or through sealed bids.
Why It Matters
Auctions are important in economics because they efficiently allocate resources and reveal the market value of items. They are widely used in financial markets, real estate, government contracts, and collectibles, and can help prevent underpricing or overpricing.
Example
A government may sell a license for radio spectrum using an auction. Companies bid for the license, and the highest bidder wins. This ensures the license goes to the party that values it most and generates revenue for the government.