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In July, 2003, with reprints and updates in December, 2004,

    Gillian Ku, Department of Organisational Behaviour, London Business School, UK, Negotiation, Organizations, and Markets Unit
    Deepak Malhotra, Harvard Business School, Harvard University, USA
    J. Keith Murnighan, Department of Management and Organizations, Kellogg School of Management, Northwestern University, USA

authored a study about auctions.

Their study was titled “Towards a competitive arousal model of decision-making: A study of auction fever in live and Internet auctions.

The entire study can be reviewed here: http://users.business.uconn.edu/jgoodman/MGMT%206201%20Assigned%20Readings%202008/6%20Decision%20making%20II/Ku%20et%20al%202005.pdf

In short, the study concluded without any significant doubt whatsoever, that “auction fever” driven by both emotion and arousal as well as “escalation” of commitment drive live auction prices beyond what an Internet (online) auction can produce.

The study’s highlights noted actual as well as theoretical results, with these findings:

Competitive arousal results from:

  • Rivalry
  • Social facilitation
  • Time pressure
  • Uniquness of being first

These arousal factors are more present in a live auction than an online auction. These factors drive certain behaviors including:

  • Impaired calm, careful decision-making
  • Less information processing
  • Increased risk taking
  • Induces over bidding

Escalation results from:

  • Inability to ignore “sunk” costs
  • Initial investments drive follow-up justification
  • Behavior which equates to not “giving up”
  • Resistance to walking-away, or withdraw

These escalation factors are more present in a live auction than an online auction. These factors drive certain behaviors including:

  • Need to justify previous bids with additional bids
  • Bidding more to promotes a positive self-image
  • Winning, even at higher costs to make the investment worthy
  • Induces over bidding

This analysis counters two long-standing arguments:

  • “Online auctions allow the bidder more information, time to think, tools to research value, bid in their pajamas and at their convenience, which promotes higher prices.”
      Exactly the opposite of what this study points out: By being at the auction live, there is less information, less time and less convenience which actually promotes higher prices due to competitive arousal.
  • “Online auctions are better as with such, the bidders only travel to the auction location if they win an item (or have it shipped,) whereas at a live-only event, they must travel first, assuming the risk of not buying anything, and returning home empty-handed.”
      Exactly the opposite of what this study points out: The “sunk” costs of travel promote higher bidding as bidders experience the “escalation” factors. Auctioneers who say the online auction makes it easier for the bidders are exactly right — it makes it easier for them to be less “escalated.”

While I’m not convinced that an online auction cannot contain “competitive arousal” and/or “escalation” I do think the odds are clearly better to have both at a live auction event.

And I’ve said quite publicly — and repeatedly — that more bidders means more money for the seller. I do think that statement is generally true, but more importantly, an auction must have the right bidders, and those bidders must be “housed” in an environment which promotes them to bid as much as possible in order to maximize the seller’s position.

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.