Two American economists won the Nobel Prize on Monday, October 12, 2020 — namely Paul R. Milgrom Ph.D. and Robert B. Wilson DrBA — for work in auction theory. One of the material conclusions of their work was that with “more disclosure” auction bidders better engage, and bid higher.
Given their conclusions are likely correct, then what would an auctioneer do to better engage bidders and have resulting higher bids? One such example would be to sell absolute (disclosing there’s no minimum bid) or with a published reserve (disclosing that number …)
It would stand to reason that auctioneers selling subject to a “secret reserve” or “confidential seller confirmation” — thus providing no disclosure of key information — aren’t better at engaging bidders, nor securing higher bids, or so Paul R. Milgrom and Robert B. Wilson would say.
The most notable issue with this is an auctioneer selling with a “secret reserve” or “confidential seller confirmation” then conducting such an auction, receiving a high bid below the reserve, and telling the client to “See how well this was marketed …” and convincing them to accept the [lower] high bid nonetheless.
Seeing how well it was marketed? Rather, it was marketed without sufficient disclosure to maximize the bidder pool and as a result the high bid. With more disclosure (the minimum bid, for example,) then more bidders would have reacted to this marketing and the seller would have benefited accordingly.
There’s another important point here … that auctioneers are possibly missing. As we noted, “Auctioneer selling with a “secret reserve” or “confidential seller confirmation” then conducting such auction, receiving a high bid below the reserve …” Isn’t it obvious what caused the bid to come in below the reserve? You could ask Paul R. Milgrom and Robert B. Wilson.
Of course, maybe the reserve itself (the seller’s expectations) was too high? In that event, the auctioneer didn’t counsel the seller about market conditions and related “reasonable expectations.” So, naturally, the bid (less than or equal to the market) didn’t reach the reserve (above the market.)
Yet, if this auction is nevertheless conducted — with less disclosure — the seller isn’t “seeing the market” and is then being induced to accept an offer below market — whereas an auction with more disclosure would have likely produced precisely market value.
We previously wrote about these sellers “seeing” (not seeing) the market: https://mikebrandlyauctioneer.wordpress.com/2022/06/27/your-seller-seeing-the-market/. Quite frankly, with the seller reserving the right to accept or reject and/or seller bidding — we’re not convinced true price discovery is being realized.
Also, so far as publishing minimum (starting) bids should be done with the seller’s clear intent to sell at any price at or above that minimum bid. Minimum bids should not be used to falsely portray the prospect of a deal when they don’t.
Finally, if you’ve done sufficient research and analysis to counter Paul R. Milgrom Ph.D.’s and Robert B. Wilson DrBA’s Nobel Prize-winning work, we’d like to see your product. It’s doubtful with as busy as most auctioneers are that there’s been any time to conduct and publish that research, as it’s unlikely you can possibly counter it.
Mike Brandly, Auctioneer, CAI, CAS, AARE has been an auctioneer and certified appraiser for over 30 years. His company’s auctions are located at Mike Brandly, Auctioneer, Brandly Real Estate & Auction, and formerly at Goodwill Columbus Car Auction. He serves as Distinguished Faculty at Hondros College, Executive Director of The Ohio Auction School, and an Instructor at the National Auction Association’s Designation Academy and Western College of Auctioneering. He has served as faculty at the Certified Auctioneers Institute held at Indiana University and is approved by The Supreme Court of Ohio for attorney education.
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