Going Once, Twice, SOLD! A take on auction and the human psyche.

Prologue

Imagine an Indian village where you have many families working hard and honestly to make a living. Along comes a government official claiming one or many of the farmers have not paid their dues for the loan they had received a few years ago and hence the government has decided to auction off the commodity that was used as mortgage for the loan — a dramatic auction scene unfolds.

This was my earliest introduction to auctions. Since then I have seen many kinds of articles being auctioned off in movies from land, to jewelry, to a person’s vote. But the common theme in all of these movies has been revolving around a single form of auction — The English auction (which seems to have the most dramatic effect for movies). I have since then been wanting to explore the other forms of auctions and the theory behind them. I hope to use this article to bring to you what I have learnt and hope you enjoy this background as much as I did.

Source: UnReal Times

Topic Introduction

Auctioning is the form of selling or buying goods by taking bids from people who are willing to participate in the process of either buying or selling the goods. Usually people who are willing to pay the most for the product win the bid and people who receive the highest bid are willing to sell the product. Of Course there are exceptions to every rule and I will go into those details below.

Auctions go way back in time, all the way to 500 B.C. when the commodity being auctioned off were women looking to get married. Auctions then took two forms; forward and reverse auctions. Based on the attractiveness of women they either had potential bidders pay to marry or the women had to pay in reverse for someone to marry them.

Romans then carried this tradition, post war the winning party claimed the remains from what was left of the carnage. Slaves, artifacts and other items were then auctioned off and proceeds used to train and maintain the army for the upcoming wars.

Auctioning lost its luster post the fall of the Roman empire but was revived again in the 16th Century by the English and has taken on many forms since then.

Conceptual Framework

Before we go into the different forms of auctions I want to take a moment to explain to you why auction is such an attractive concept and when sellers and buyers use them.

Why use auctions:

From the sellers lens:

• Has a definitive time and date for the sale: Say you are a seller and in need of cash in a short span of time, unlike in e-commerce websites where you do not know if you will make and sale and when, auction is a very attractive option as you can state a start and stop time for the product’s auction.
• Uses value based pricing rather than cost based pricing: The sale price of the product is as much as you think is worth to the buyer and really plays into the value based pricing model vs cost based. If you’d like to learn more about this pricing strategy be sure to check out this article.
• Is able to drive up competition by using FOMO: FOMO or the fear of missing out is a very powerful tool that plays in the favor of the seller, depending on which auction model is being used there is a very high chance that the seller can drive up the FOMO factor among buyers and end up making a much bigger margin on the sale than otherwise.
• Has the benefit of having a third party do the market analysis and thus know the market value: There are hundreds of famous auction houses around the world, as a seller you can pick the one that specializes in your product and they will handle the market analysis, the pricing strategy, the promotion of the sale etc. for a price of course but you are able to leverage of the subject matter expert and use it to your advantage here.

From the buyers lens:

• Know the seller is committed to sell: Imagine walking into the market, looking at all these sellers and great items but you don’t know if the seller wants to sell. How frustrating and uncertain would that situation be. Wouldn’t you assume that because someone is selling at the market they definitely want to sell? That is what the auction also does to you, in this case you actually know the asking price even before you go into the market and know if you can pay the asking or if you want to escalate.
• Knows that they getting the item at a fair market price: Depending the firm conducting the auction, the number of people participating in the auction and the price of similar products in the market, the seller will know that they are getting a fair market price for the item as the asking and selling price is out in the open.
• Helps determine willingness to pay: You know the price before you go into the bidding process. If the asking price itself is beyond what you are comfortable paying then you can walk out of it then and there. Also depending on your willingness to pay and the type of auction you can quote what you are comfortable paying and not give into external pressures.

All in all, action packed for both parties.

Types of auctions

In this article I will broadly cover the following forms of auctions:

English Auctions

English auctions are “open” and generally fully transparent. Due to this dramatic effect, this is the preferred auction in movie scenes :)

• The auctioneer/seller opens the bid with a desired open bid. Usually this is the minimum that the seller is willing to take for the product/item.
• The interested parties start by expressing their desire to bid, the current value is also known as the standing bid.
• There are set increments to the bid, which is predetermined by the auctioneer/seller. Example — every incremental bid will increase the standing bid by say $2000.
• The person with the highest standing bid stands a chance to win the bid.

As I said at the start of this section this is an open auction thus keeping it transparent for both the bidder and the seller. There is also a slight advantage to the seller in this case as this plays on one of the biggest psychological angels, FOMO or fear of missing out. Imagine this scenario, you are in a bidding situation and know what you are comfortable with but you realize you really like the item and are willing to go above your comfort zone. Given the bidding is transparent you will probably keep going way over the comfort zone as you know what the standing bid is and your desire keeps justifying your act.

Dutch Auctions

Dutch auctions start with a price that is much higher than what the seller is expecting to receive for their goods and keep decreasing the price until one of the bidders is comfortable paying that price. This is followed with goods that could lose value as time progresses, example : flowers, perishable goods etc. The value and the freshness of the flowers is probably highest when recently picked and hence a higher value and as time progresses the freshness decreases and hence a decrease in value and overall cost.

With this approach the buyer can wait until they are comfortable with the freshness of the item, bargain for a price that the buyer and seller are comfortable with or pay the asking price at that point in time.

Vickery or second- bid Auctions

Vickery or second-bid auction generally follows the closed bid method where the bidders write down the price they are comfortable with paying for the item. Of course, the bidders generally set a starting price and bidders write down increments from this starting point. Since this is a second-bid auction, the highest bidder wins but pays the second highest bid.

This approach benefits advertisers as they can bid the maximum they would be prepared to pay while still ensuring they don’t pay more than the actual market value. Many online advertising agencies follow this as their bidding model.

There are of course many other auction methods that I have not covered here but have been used in other forms.

The Nexus Beyond

Here are a few examples of where auctions are used today.

• Real Estate auctions.
• Social media advertisements.
• Government contract auctions for building states’/cities’ infrastructure.
• Charity auctions that will contribute towards a charity supporting social causes.
• Commodity/estate auctions.
• IPL/cricket team auctions. Here is a short article about IPL I wrote sometime back.