Many in the auction business wonder: Is selling online better, or is selling live better?
Some have also asked: Is there any evidence of the answer — has there been any research completed on this matter?
The answers to these questions have indeed been explored, and there has been considerable research.
For one, the foremost research was completed in 2003; a research paper titled “Selling online versus live” was released as a result of work by,
Eiichiro Kazumori, PhD (California Institute of Technology)
John McMillan, PhD (Stanford University)
dealing with the issue of utilizing ascending auction methods.
Assisting with the research were staff from the Center for Electronic Business and Commerce at Stanford University’s Graduate School of Business.
Their complete paper can be downloaded here: http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.85.2433&rep=rep1&type=pdf. We’ll note in this article a summary of their work with some examples.
Kazumori and McMillan describe the Internet as a mechanism which has made markets more efficient; buyers now can more easily find what is available, where it is and the associated price.
The researchers describe this process as lowering search frictions, meaning there is less resistance (less work involved) when trying to find out information about whatever is desired.
Yet, Kazumori and McMillan point out the Internet has not reduced one specific search friction — verifying quality. This friction means that online prices tend to be less competitive if verifying quality is a material issue.
Kazumori and McMillan found that “conventional wisdom” was that lower-priced items could be sold online effectively, but higher-priced items sold better live — because the buyers would hesitate to bid online on something of high value lacking an in-person inspection, but freely and willingly bid on lower-valued items.
However, Kazumori and McMillan counter this theory as ill-founded. Many high priced items sell well online, and some lower priced items sell better live. Their research suggests the contrary that the “crucial variable” is not the expected price, but rather the extent of valuation uncertainty.
They point out that there are two main differences between online and live auctions:
Less information is available for online bidders. In a live auction bidders inspect the item at their discretion while online bidders get only what information is posted on a web page; an online bidder’s information is more limited.
Transaction costs for a live auction are higher. Online, the seller’s costs are essentially the cost to run the website. Live, the auctioneer pays the cost of “mounting the pre-sale exhibition” and in running the “theatrical performance” that makes up a live auction. Bidders have negligible costs to bid online, whereas to bid live they incur travel and other participation costs.
Their research paper suggests that an auction seller faces a tradeoff. They say:“On the one hand, the costs to the seller and the bidders of participating are lower online. On the other hand, online bidders worrying more about the winner’s curse, bid lower…”
Kazumori and McMillan note the choice between selling live and online depends upon three parameters: The item’s expected value, the estimate variance and the extent to which this variance is lower live than online.
Simplifying their example, let’s say there is a seller wishing to sell an item at auction. Given the item is generally considered “worth” somewhere between $7,000 and $10,000 (the three highest bidders think it’s worth $7,000, $8,500 and $10,000) should this seller auction this item live or online?
Kazumori and McMillan’s theory is that bidders generally bid higher given more information. In other words, will the “$8,500 bidder” we’ve identified increase his bid if he can actually see the item and be more informed — more comfortable, more confident? Kazumori and McMillan think possibly so.
But this increased confidence comes with a seller cost. If this “$8,500 bidder” increases his interest to $9,000 then this seller’s item will demand $9,100 instead of $8,600 — a $500 gain. Yet, does the live auction cost the seller in excess of $500 more than the online event?
And, we shouldn’t forget that the expected value of the item is an issue (one of the three parameters.) If the ultimate sale price was $9.1 million instead of $8.6 million — a $500,000 gain, then the additional cost to conduct the live auction would almost certainly be prudent.
However, let’s say there isn’t any increase and/or the estimates of worth are more tightly bunched (more easily ascertained, and/or there is valuation certainty.) Then, Kazumori and McMillan say the online auction is more suitable as it saves the live transaction costs without sacrificing price.
Finally, Kazumori and McMillan also applied their research to auctions which combine online and live components. What is interesting is that Kazumori and McMillan’s research is counter to what most auctioneers believe, which is that combining online and live may be the best solution.
Kazumori and McMillan say:“From the seller’s point of view, however, this in-between alternative offers none of the saving in transaction costs of true online bidding …”
They say further:“Online bidders in a live auction are in a no-win situation; the theory says they can expect to pay the item’s full expected value. They can overcome their informational disadvantage by either inspecting the item themselves at the presale exhibition or hiring an agent to do the inspection; but this means incurring the same transaction costs as the live bidders. Rather than providing the best of both worlds, mixing online and live bidding combines the disadvantages of both …”
I believe what Kazumori and McMillan are saying is that given an online bidder is bidding against better-informed live bidders, he will overpay in order to win — or rather lose (the winner’s curse,) which they say online bidders inherently attempt to avoid by bidding less. Yet, as the buyers lose, the sellers win?
Kazumori and McMillan don’t address this issue in particular, but it seems as buyers lose, their confidence in the online bidding platform lessens — which effects the next online auction; is it reasonable that if a live bidder overpays he blames himself and his own inspection — rather than the process — while if an online bidder overpays, he blames his inability to inspect, except maybe in cases where nobody had any opportunity to inspect?
Kazumori and McMillan infer that the online auction saves transaction costs and to leverage that, no live auction should be held. As well, the live auction increases bidder confidence and to leverage that, no online auction should be held. In other words, their research suggests any auction should be either online or live, but not both.
“The crucial parameter for whether the seller does better online than live is not the expected price, but the valuation uncertainty,” say Kazumori and McMillan.
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 is adjunct faculty at Columbus State Community College and is Executive Director of The Ohio Auction School.
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