Are there any auction houses out there bringing truly unique and different approaches to the way auctions are run in order to increase the participation and ultimately the price offered for properties?
Until recently I never knew how many different types of auctions there were. I only knew that there was something that just didn't feel right about the prospect of winning an auction. If you win, everyone else valued the property less than what you offered. How can anyone feel good about that?
I came across the following book and discovered a whole new world of how auctions are run...
Amazon.com: The Art of Strategy: A Game Theorist's Guide to Success in Business and Life: Avinash K. Dixit, Barry J. Nalebuff: Books
Some examples:
- English auction, also known as an open ascending price auction. This type of auction is arguably the most common form of auction in use today. Participants bid openly against one another, with each subsequent bid higher than the previous bid. The auction ends when no participant is willing to bid further, at which point the highest bidder pays their bid.
- Dutch auction also known as an open descending price auction. In the traditional Dutch auction the auctioneer begins with a high asking price which is lowered until some participant is willing to accept the auctioneer's price. The winning participant pays the last announced price.
- Sealed first-price auction, In this type of auction all bidders simultaneously submit sealed bids so that no bidder knows the bid of any other participant. The highest bidder pays the price they submitted. This type of auction is distinct from the English auction, in that bidders can only submit one bid each. Furthermore, as bidders cannot see the bids of other participants they cannot adjust their own bids accordingly.
- Vickrey auction, also known as a sealed-bid second-price auction. This is identical to the sealed first-price auction except that the winning bidder pays the second highest bid rather than their own. (I like that!) This is very similar to the proxy bidding system used by eBay, where the winner pays the second highest bid plus a bidding increment. Although extremely important in auction theory, in practice Vickrey auctions are rarely used. (Why?)
- No-reserve auction (NR), also known as an absolute auction, is an auction in which the item for sale will be sold regardless of price. From the seller's perspective, advertising an auction as having no reserve price can be desirable because it potentially attracts a greater number of bidders due to the possibility of a bargain. (But you better be truthful!)
- Reserve auction is an auction where the item for sale may not be sold if the final bid is not high enough to satisfy the seller - that is, the seller reserves the right to accept or reject the highest bid.
- Round robin auction is a variant of the English auction sometimes used to sell real estate. Potential buyers inspect the property, and then place bids before a certain deadline. Then each potential buyer is contacted by phone in a round robin fashion, told the highest bid to that point, and offered the chance to keep their previous bid, raise their bid, or drop out of the auction.
- Japanese Auction: The main feature of the Japanese auction is that bidders must bid at each level to remain in the running for the featured item. Think of a room full of people willing to participate and everyone has their hand raised. As the price rises, hands are dropped, the last person with their hand raised wins.
- According to "game theory", with a large enough pool of bidders, each auction type results in the same average price (see 2002 Nobel Prize in Economics)
- Prices will be maximized when you have a large pool of bidders
And that's the rub. If auction houses got more creative with the "way" they were auctioning properties, maybe they would attract more buyers?
I especially like the Vickrey / eBay process where the winner pays the 2nd highest price + a nominal increment. You can even combine this with a sealed auction where the winner pays the next highest bid. That in itself should increase the number of bids auction houses are getting!
I think there is some opportunity for innovation in the auction process. Maybe an auction house will get creative with how they run auctions - I think they will be a big part of the "clearing out" process over the next few quarters. It's all about volume - volume of houses listed and volume of buyers bidding.
