This replaces a system under which airpoints users could get an upgrade if they paid a fixed price before a flight and a seat was available.
Air New Zealand says the change is being introduced after a successful international trial over the past year. The change had had negative and positive feedback, a spokeswoman said.
Blogger David Farrar said it was the last straw for him.
"Air New Zealand has continually downgraded the value of their airpoints and loyalty programme. Time after time after time they have degraded it. However there was one aspect left that made it worth staying on for - long-haul upgrades."
But frequent flyer and blogger Cathy Odgers (aka Cactus Kate) defended Air New Zealand, saying Mr Farrar's wider "rant" on Kiwiblog was "unfair and an overreaction".
"Auction systems mean people may very well pay less for an upgrade than they currently do in airpoints. Anyone who can work Trade Me will understand this. I would have to use the auction to see how it works, but you can't really lose as you still get to fly don't you?"
Another online commentator said Air New Zealand was "really screwing its frequent travellers over".
"Having to bid for [upgrades] is truly bizarre."
Another said: "I give it three months. Either vigorous bidding will drive away too many valuable customers (missing out on or feeling ripped off for upgrades), or lackadaisical bidding will see them giving away upgrades too cheaply."