An auto auction is quite simply an auction for vehicles, usually cars.
The auction process takes place as normal, with the lot being displayed, and bidders contesting each other, with an auctioneer presiding. Usually an auto auction takes place between car dealerships and is not open to the general public.
Auto auctions often deal with off-lease, off-rental, company cars, or repossessed vehicles. Off-lease means vehicles returned to the financial institution at the end of a lease term, and are usually only found at auctions. Off-rental refers to the practice of rental companies to update their fleets of cars every years, meaning that they have a stock of well kept cars of a recent model and only a short usage, which need to go. Car dealerships will likely want these cheaper cars to fill up their stocks. Company cars and larger vehicles are a similar affair, being constantly updated, but the amount of use and the condition is as varied as the amount of different vehicles used by a large corporation. Repossessed vehicles have been recalled by companies either voluntarily in the case of defects or product changes or involuntary in the case of misuse.
Auto auctions allow a dealer to get rid of old stock that would not sell to the public. They keep the variety of vehicles moving and also allow dealers to assess the condition of the market by looking at the quality of cars and the actions of other dealers. The prices of cars at auctions are not low enough to make killer profits but do allow the dealers more freedom. One problem with auctions however is that the vehicles cannot be inspected by mechanics or test driven until sale is complete. Dealers are legally required to announce faults or problems before auction but still sometimes discrepancies lead to unpleasantness. On the whole, however, auction is a very useful tool to a dealer.