If the house is going to auction, then they're highly unlikely to accept a conditional offer, or at best, you'll have to obtain finance approval prior to the auction, eg only have a week or so to obtain finance, which will be tight unless your LVR is low, income high, no complications (ie PAYG earner, no structures, no refinances required, etc).
With regards to having higher offers... maybe, maybe not. More likely, the agent's playing games to try and increase your offer.
If it's for an IP, and you don't mind missing out, figure out how much you want this particular IP, and at what point the deal changes from "fantastic" to "good", and don't offer any more than this.
You could try saying to the agent "Oh, I was really only interested at this price, but if there are others around who are willing to pay more, then the vendor should definitely run with that because I can't go that high", and see what reaction you get. If the agent seems unwilling to cease negotiations with you very easily, then your offer is more important to him than he's letting on, and that's probably because there are no other offers.
Of course, there's a chance (small, IMHO) that he'll say "OK then, thanks for your interest, bye". If that happens, you need to be prepared to walk away. But if, as I suspect, the agent tries to keep you interested, then you've gained the upper hand - they need you more than you need them, and you've made that clear.
If it's for a PPOR, you intend to hold for a long time, and you really, really want this house, then it's up to you to decide how much you're willing to pay for it. I don't consider my PPOR an "investment"; it's a lifestyle choice to live in my own home (no inspections, can change it however I want, etc), so dollars aren't the primary consideration. If you would be devastated to miss out, then you may decide to make a BAFO (best and final offer).
In either case, I would not increase my offer until the vendor makes a counter-offer, or you obtain some concession. Just increasing your offer because they've asked you to makes you look like a pushover, IMHO.
So if it's a PPOR that you really want and you're prepared to pay, say, $50K more, go back and offer $25K more, but put an expiry date on it, eg vendor has to sign the contract by COB tomorrow for the higher price to be valid.
If you feel able to make an unconditional offer, then I'd make the cancellation of the auction, and cessation of inspections and advertising, one of the conditions of the offer.