I like the auction idea for items of a few thousand gp or more in value. Anything less would be common enough that there would be a shop somewhere specializing in it. 50 gp potions, for example. The customer base for the cheap magic items would probably be the same as that for weapons/armor.
However, IMO these "simulation" type issues always bring up the question of whether or not the core rules represent the sum total of all possibilities in the world, or whether or not they are just representative of what's out there. For example, are there only +1 swords, or are there "sword +1, except on weekends", "sword +1 against everything except gnomes", "sword +1, but breaks 2% of the time on a swing", "sword +1, but has other properties not identifiable by magic" and so on.
So if magic has an infinite number of manefestations, and magic items come in infinite variety, then what could a government or individual do to figure out what exactly they are buying?
Also, in a pseudo-medieval world maybe the structures, bureaucracy doesn't exist to track even the DMG-approved magic items much less the infinite varieties. Psuedo-medieval worlds are typically just recovering from some recent cataclysm, and government is in the hands of minor lords. Without the super-structure of some world-spanning guild, it's really a case of buyer beware.
Finally, is there a chance that some spell better than the 1st level Nystul's Magic Aura is out there that can make the situation even more of a nightmare. Conning people is pretty simple when it comes to magic IMO because it's a matter of greed.
People with the resources to take chances on investments, buy magic beans or snake oil and see what it does, hoping that some percentage of the time the item turns out to be beneficial, might be the typical customers in the worst case scenario.
And also, I think most magic items hardly qualify as nuclear weapons. I would imagine someone with 2,000 gp would rather hire soldiers than get a +1 sword. It's only the metagaming logic that restricts PCs from hiring help to the limits of what they can afford that skews the market for magic items in the eyes of players.