The Origin of the Dutch Auction

I had to read the book The Botany of Desire by Michael Pollan for a class last semester, so when we started talking about Dutch auctions and the flowers that started them, I knew immediately what flower we were talking about. This article reveals the origin of the Dutch auction; it began when traders from the Ottoman Empire brought tulip bulbs to Holland. Their novelty made them an instant favorite, and the demand for the bulbs grew quickly. However, it takes seven to twelve years for a tulip to grow from a seed to a tradable bulb, and tulip bulbs are only able to be dug up and moved in the summer months. In fact, one of the most coveted types of tulips was the Semper Augustus, which was desired for its coloration. This coloration was caused by a virus, which made this type of flower even more difficult to successfully cultivate. Therefore, demand was growing higher and higher while supply had to remain relatively constant, and this situation drove prices for the flowers extremely high.

The market for tulips led to multiple new financial developments. One of these was the Dutch auction. Marketplaces were overcrowded and disorganized, so the Dutch auction was invented to get traders in and out with what they wanted as quickly as possible and at a high price. The sellers would begin at a price at which they knew demand would be zero, and then lower the price at a known increment. Once a seller reached his internal price (which we know as the true value), the buyer would place a bid. Therefore, the bid was the price equivalent of a first-priced sealed-bid auction. This method was especially beneficial to the seller, who would always get the highest possible price for the bulb they were selling; on the other hand, the buyer would have to pay his maximum internal price, or his true value.

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1 thought on “The Origin of the Dutch Auction”

  1. Very insightful observation here. I like how you pulled from the contemporary works of Pollan. I had read that particular book as well for a class and hadn’t thought to connect A with B. It would be interesting to trace other financial mechanisms through the past to find out how their development may of been born of similar need for distribution. Here I cannot help but wonder if it was a symptom from the Dutch Auction that helped encourage the Semper Augustus’s inflation of the Tulip Bubble that wrecked the market. The highest true value paid continually as the good became more scarce due to genetical weakness with a driving demand in exponential proportion might of been the straw for that camels back. Perhaps a more compromising exchange system that gave buyers more power would of slowed the effects enough to avoid the disasters that unfolded.

    -ShaneO

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