In auctions where there is potential resale of the items under the hammer, bidders who are prepared to pay the most may decide not to compete and instead wait to bargain with the winner. This not only means that the participants who should win the items are not winning, but it also affects the revenue generated by the auctioneer.
These are the findings of research by Marco Pagnozzi and Krista Saral, published in the December 2017 issue of the Economic Journal. Their study analyses how the possibility of post-auction transactions can transform some auction participants into speculators, which should influence the design of the auction itself.
Auctions have been a popular way to trade goods and services since ancient times with their use in Babylon even recorded by Herodotus in the fifth century BCE. Today, auctions are commonly used across a variety of contexts, ranging from industry purchases of raw materials and government auctions of spectrum and oil drilling licences to more consumer-oriented markets such as eBay.
Because auctions play such an important role in the modern economy, practitioners and researchers have worked diligently on issues related to their proper design and implementation. This work has answered such questions as how to structure pricing and winner rules, how to set reservation prices and even behavioural topics such as how different formats may drive ''joy of winning'' emotional responses.
While addressing these questions is important, the work has largely overlooked an important aspect of proper auction design – namely, how post-auction transactions may influence the auction itself.
At first glance, this appears to be a trivial point. Once the auction is concluded, why should any post-auction transaction be a cause of concern? For example, a wine collector who purchases a case of wine through auction might later choose to resell it to a restaurant; or a company bidding on emission permits might later choose to resell on the spot market. These transactions are after the auction concluded – so what does it matter for the design of the auction itself?
The new study demonstrates that when an auction is followed by potential resale of the items, bidders integrate this option into their bids, which changes the identity of the winner and the revenue generated by the auctioneer.
Specifically, when an auction is followed by a resale opportunity, bidders are not all simply bidding for the right to own an item and use it. Some bidders begin bidding for the right to purchase the items and then resell to other bidders who value the items more.
In other words, the presence of a resale option transforms auction participants into speculators. The bidder that places higher value on the item then have two options: compete against the speculators to win the item; or wait for the resale market and bargain with the winner.
In most cases, high valued bidders wait for the resale market. Consequently, auctions revenues are lower as high valued bidders are choosing not to compete against the speculators. And the participants who should win the items (the high valued bidders) are not actually winning, thus lowering the efficiency of auction market as well.
''Demand Reduction in Multi?object Auctions with Resale: An Experimental Analysis'' by Marco Pagnozzi and Krista Saral is published in the December 2017 issue of the Economic Journal. Marco Pagnozzi is at the University of Naples Federico II. Krista Saral is at Webster University Geneva.