absolute, Adam D. Galinsky, auction, auctioneer, auctioneers, auctions, bidders, client, creative, Gillian Ku, J. Keith Murnighan, knowledge, lower, market value, minimum bid, Northwestern University, prospect of a deal, real estate, real property, sold, want, with reserve, without reserve
It is no surprise to virtually any auctioneer that when an item “worth” about $1,000 is offered at auction, it will sell for more when the initial bid (or minimum bid) is $100 versus when the initial bid (or minimum bid) is $500.
Thus the conclusion of the study titled “Starting Low but Ending High: A Reversal of the Anchoring Effect in Auctions“ by Gillian Ku, London Business School and Adam D. Galinsky and J. Keith Murnighan of Northwestern University.
In summary, the study shows that three processes contribute to this effect:
- Lower starting prices reduce barriers to entry, which increase traffic and generate higher final prices.
- Lower starting prices entice bidders to invest time and energy (creating sunk costs) and, consequently, escalate their commitments.
- The traffic generated by lower starting prices can lead bidders to infer value in the item, thereby explaining previous findings that traffic begets more traffic.
Auctioneers have told potential clients for centuries that “the lower we start, the more you will receive,” and/or “it’s not where you start, but where you finish.”
As we analyze this study’s three major points, we cannot but help say why people attend auctions — four words which propel millions of people to auctions who would not otherwise have any interest in attending an auction at all — the prospect of a deal.
If there is an opportunity for a deal, people will respond, and lacking the chance of a deal, they will not.
We talked about this phenomenon in our article some time ago titled: Auctions and an Iowa Corn Field.
A wonderful example of this theory was played out about 10 years ago in Westerville, Ohio. We had been hired to conduct an auction for real property of a house, and surrounding 5 acres. The minimum bid for the auction was $125,000. After about five weeks of advertising, including local MLS, newspaper, signs and other promotional material … nobody showed up.
Our client asked us what to do. We suggested lowering the minimum bid to $75,000 and conducting a second auction in about five weeks. With this new lower minimum bid, we again advertised the auction in MLS, newspaper, with signs, and other promotional material.
The second auction resulted in 6 registered bidders (6 more than previous), and a high bid of $131,000.
Even though the property could have sold for $6,000 less five weeks earlier, the public did not respond, as the auction lacked the one imperative component: the prospect of a deal. Once the prospect of a deal was clearly communicated (you might get this property for as little as $75,000), the public responded, and a higher price was realized.
Almost all auctioneers throughout the United States have similar stories such as this.
It is also prudent to note, although not entirely within the control of the auctioneer, that when property is sold at auction, the lower the “opening bid” by that first bidder, the more likely a higher price will be received as a final bid. Many times when property is sold at auction, and the first bid is viewed as unusually high or higher than expected, it can tend to freeze the other bidders, and often results in lower final bids.
Most importantly, the auction method of marketing where the minimum bid is low, or there is no minimum bid, results in the highest prices. On the contrary, high reserve prices or the uncertainty of seller acceptance of the final bid results in lower prices.
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 Executive Director of The Ohio Auction School.