For our discussion here, we look at three types of auctions:
English auctions
Sealed bid auctions
Dutch auctions
In analyzing these three types, we first start with our definition of each:
An auction where bidders bid openly against each other in attempts to purchase property, and the bids continue to increase (by increments) — selling to the highest bidder — is known as an English auction.
An auction where bidders submit private bids in attempts to purchase property (sealed) — selling to the highest bidder — is known as a sealed bid auction.
An auction where the price is gradually decreased (by decrements) — selling to the first bidder to accept that price — is known as a Dutch auction.
Today, we focus on the primary difference between the English auction and both the the sealed bid auction and the Dutch auction. Our mathematical model suggests:
The English auction, sealed bid auction and Dutch auction all work about the same for the seller if there is a broad consensus (smaller variance) of knowledge about the value of the subject property.The sealed bid auction and Dutch auction works better for the seller than the English auction if there is a lack of consensus (larger variance) of knowledge about the value of the subject property.
Traditional thinking is this: If Carla, Bill and Trevor are all interested in a particular 18th Century painting at auction.If there is a consensus of value as Carla is willing to bid $7,500, Bill is willing to bid $7,500 and Trevor is willing to bid $7,500.
An Engish auction results in someone winning the painting for about $7,500.
A sealed bid or Dutch auction results in someone winning the painting for about $7,500. If there is not a consensus of value as Carla is willing to bid $10,000, Bill is willing to bid $7,500 and Trevor is willing to bid $5,000.
An Engish auction results in Carla winning the painting for $7,600 (one bid over Bill’s $7,500 bid.)
A sealed bid or Dutch auction results in Carla winning the painting … for as much as $10,000.
However, these are mathematical models and assumptions.
Bidding in an English auction is intrinsically emotional. The pressure and urgency in an English auction are absent in the sealed bid auction and Dutch auction. This highlights another key difference between these two types of auctions:In an English auction, the bidders know the other bids. For example, if someone bids $7,500, the auctioneer will then ask for $7,600. The bidders considering bidding $7,600 know that someone else bid $7,500. The high bidder forces the other bidders to reevaluate their perception of value.In a sealed bid auction and Dutch auction, the bidders act with the lack of knowledge of the other bids. For example, a sealed bid bidder submits his bid of $7,500 not knowing what other bids there are … or if there are any other bids; in a Dutch auction, once someone bids $7,500, the auction is over.
Research strongly suggests that when people are in competitive situations (such as an auction,) they act on emotion and want to “win.” Further, at auction, bidders are seeking to get a deal, as in the lowest price for which they can procure the property.
Given these two premises:
In the open, incrementally increasing English auction, both premises are in play: Each bidder is trying to “get a deal,” coupled with the open, disclosed competition from other bidders pushing them to bid more.
In the closed, sealed bid auction and Dutch auction, no knowledge of the other bids is provided. Therefore, each bidder bids solely based upon their desire to “get a deal,” with (at best) assumptions about the other bidders.
Our conclusion is that the English auction takes advantage of the emotion in purchasing at auction — pushing prices for the seller well beyond prices typically realized at sealed bid auctions and Dutch auctions. Only if the purchase lacks emotion and there is a wide variance in opinion of value can the sealed bid and/or Dutch auction be more beneficial for the seller than the English auction.
Lastly, auction situations lacking emotion are rare. Coupled with this rarity, there is an ever-increasing knowledge and awareness of market values and trends — primarily due to the Internet. As these factors continue to move in this direction — the English auction becomes the default auction method to maximize price for sellers.
Mike Brandly, Auctioneer, CAI, AARE has been an auctioneer and certified appraiser for over 30 years. His company’s auctions are located at: Mike Brandly, Auctioneer, Keller Williams Auctions and Goodwill Columbus Car Auction. His Facebook page is: www.facebook.com/mbauctioneer. He serves as Adjunct Faculty at Columbus State Community College and is Executive Director of The Ohio Auction School.
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