New economic research suggests some winning strategies for buyers and
sellers taking part in auctions in which a number of similar items are sold one
after another. The analysis by George Deltas and Georgia Kosmopoulou,
published in the January 2004 issue of the Economic Journal, indicates that:
· If you are a buyer and are looking for bargains, bid on lots that are sold
late in the auction, have relatively short descriptions in the catalogue,
are placed in the middle of pages, and have small or no photographs
associated with them.
· If you are a seller and you have some control over the placement of
your lot in the auction, place it early in the auction if it is minor item
(relative to the other items on sale) and late in the auction if it is a
major item.
The researchers study two basic questions. When looking to buy in an auction
where similar items are sold sequentially, should you compete for those that
are put up for sale relatively early or those that are put up for sale relatively
late? Similarly, as a seller in a sequential auction, should you place your item
early in the auction or late?
Economists have investigated these questions since the mid-1980s, when
Professor Ashenfelter of Princeton University discovered that identical cases
of wine sold by auction an hour apart from each other differed systematically
in price. The lots of wine sold later in the auction tended to sell for lower
prices than the lots of wine sold earlier.
This was dubbed an ‘anomaly’ because it presented a clear arbitrage
opportunity for potential buyers. A number of studies have since observed that
some products sold by such sequential auctions tend to experience declining
prices, while other products tend to experience increasing prices.
Understanding why that’s the case can help sellers better sell their products
and buyers better time their purchases.
Most researchers have attributed the patterns to the strategic behaviour of
very sophisticated bidders: they show that such strategic behaviour can
indeed create predictable price trends. Other researchers have attributed the
patterns to subtle differences in the quality of the items sold over an auction,
showing that in some of these auctions items sold early are sometimes of
better quality than those sold late.
This research takes a radically different tack. The authors investigate whether
some of these price trends could arise from the nature of the auction
catalogue. They note that if the price trends arise from the way the catalogue
is written, then bids submitted by mail would also exhibit systematic trends.
This indeed turns out to be the case. Using data from a sale of rare books, the
researchers find that the probability that a lot receives no mail-in bid increases
for lots listed further back in the catalogue (and sold late in the auction).
Moreover, the variance in the number of bids tends to increase with the print
order. Lots listed early in the catalogue receive a more uniform number of bids
than lots listed later in the catalogue.
The researchers have been able to trace these patterns to bidder (or rather
‘reader’) fatigue. In the first pages of the catalogue, the bidders give full
attention to all lots. As they go through the catalogue, fatigue sets in. The
bidders' attention gets ‘captured’ by certain features of the description of the
lot, such as its location on the page and the length of the description. Lots
with a longer than average description length, or with a description that is
located at the top of a page, get an increasing number of mail-in bids, while
the other lots get a progressively smaller number of bids, and frequently get
none.
The increased variability of the number of bids carries over to prices. Had
mail-in bidders been the only participants in the auction, price variability and
expected price would be higher for lots placed at the end of the catalogue.
However, the expected price of lots with short descriptions is lower the further
down the catalogue these lots are placed. It is only lots with long and average
length descriptions that experience price increases.
The impact of description length is quantitatively important. A lot with a 21-line
description that is moved from the first half of the auction to the second half
would experience a price increase of 23%; a lot with a 9-line description would
experience a 2% decline (the median description length is 14 lines).
These effects arising from the print order of the catalogue also influence,
though to a lesser extent, the behaviour of floor bidders, that is, bidders who
submit bids in person. Thus, actual prices in any auction with a catalogue are
in part determined by these effects.
ENDS
Notes for Editors: ’"Catalogue" vs "Order-of-sale" Effects in Sequential
Auctions: Theory and Evidence from a Rare Book Sale’ by George Deltas and
Georgia Kosmopoulou is published in the January 2004 issue of the
Economic Journal.
Deltas is at the University of Illinois; Kosmopoulou is at the University of
Oklahoma.
For Further Information: contact George Deltas via email: ; or RES Media
Consultant Romesh Vaitilingam on 0117-983-9770 or 07768-661095 (email:
romesh@compuserve.com).