Let’s explore this fairly common question of “Should the reserve be disclosed?” with a hypothetical example.
Marvin wishes to consign his 2009 Jaguar XF Coupe to the local auto auction. Marvin paid about $59,000 for this car about a year ago, and now wishes to sell it. The auctioneer with the local auto auction explains that there are two types of auctions: Either the car can be sold to the highest bidder, regardless of price, or it can be sold subject to either Marvin’s approval of the final bid or with some minimum (reserve) bid.
The auctioneer and Marvin discuss the merits of these various methods; Marvin ultimately decides that he wants to sell the car, but for no less than $25,000. The auctioneer characterizes Marvin’s decision as one where Marvin wants to sell his car “with reserve” and with a predetermined reserve price. If the car demands $25,000 or more, it will sell — and if the doesn’t, it won’t.
Marvin and the auctioneer sign all the necessary paperwork and then a final question arises: Should the reserve be disclosed? In other words, should advertising include this information? Should potential bidders be informed of the reserve price?
There seem to be two schools of thought on this topic amongst auctioneers. Those appear to be:
No, don’t disclose the reserve By disclosing the reserve, this will encourage bidders to think the car is only worth $25,000 or so, and place a barrier (of sorts) in their minds that this $25,000 is the market value. By not disclosing the reserve price, bidders are free to think the car is worth much more (and free to think there isn’t any reserve at all, or that the reserve is otherwise insignificant,) and this will result in a higher final bid price.
Yes, disclose the reserve By disclosing the reserve, it suggests to potential bidders that nothing is hidden or secretive about this auction — the message is “We’re telling you all we know.” Too, $25,000 would appear to be a very reasonable price for this car, so by disclosing that number, it will likely cause many inquires, as the bidders know if the car demands $25,000 or more, it will sell. This will result in a higher final bid price.
As can be noted here, both schools of thought result in the auctioneer thinking this method results in a higher final bid price — which is most likely what Marvin desires.
What’s the right answer? Is there a right answer?
It seems clear nowadays that auction attendees (bidders and buyers) are astute, and are more inclined to participate in auctions with increased disclosure and transparency. I would suggest that if an item has an undisclosed reserve, it’s just as likely the potential bidders will think the reserve is probably high, or unreasonable, as it is that they will think the reserve is modest.
Further, if an item has a modest reserve, why not disclose it? Potential bidders have a broad range of resources available to them to find out what this car is worth, outside of the stated reserve. If other sources suggest the car is worth $40,000, does anyone really think the $25,000 will serve as a barrier in their bidding?
What if Marvin decided he wanted a $50,000 minimum bid? Would it be good then to disclose this fact? Probably not. If other 2009 Jaguar XF automobiles are available on the market for $40,000, who would attend this auction knowing the bid would have to reach $50,000 in order for the car to sell? Probably nobody. Yet, could the bidding reach $50,000 in the heat of the moment? It could, but only if the auctioneer had bidders.
Could it be this simple? If the reserve is good news (modest or low,) disclose it. If the reserve is bad news (too high,) then don’t? I would suggest that this may indeed be the moral to our story here. Yet, if this became the pattern of sorts, which then the public was able to perceive, then anytime a reserve wasn’t disclosed it would send a signal that it must be bad news?
Individual auctioneers certainly could create their own patterns, or precedent. For example, another auto auction across town sells cars with reserve, and never discloses the reserve prices. As most all cars indeed sell at this auto auction, the public has learned that even with the undisclosed reserves, those reserves are, for the most part, immaterial.
Lastly, could a very low disclosed reserve suggest to the public any bad news? What if Marvin wanted a reserve of $10,000 on his 2009 Jaguar XF? Would a reserve that low hint that something was wrong with Marvin’s car? If this $10,000 reserve was academic (anyone would bid $10,000 on this car), then would it be better to not disclose the reserve?
The discussion about disclosing or not disclosing reserves at auctions will undoubtedly continue.
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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