Do auctions work better when sellers provide as much information as possible about what they are selling? Two American economists who won the Nobel Prize on Monday, October 12, 2020, for improving how auctions work believe that to be true.
Paul Milgrom and Robert Wilson believe that some buyers attempt to buy property and make bids without knowing the current market value. As such, they begin to worry that they might only prevail by overpaying (the winner’s curse) and can respond to that concern by scaling back their offers.
We wrote about the winner’s curse here: https://mikebrandlyauctioneer.wordpress.com/2020/10/14/the-winners-curse/ where we noted strategies for all auction bidders/buyers to avoid it. The main tenet of avoiding it is comprehensive disclosure by the seller concerning the subject items up for auction.
Wilson and Milgrom’s research showed that when the seller provides as much information as possible before the bidding begins — including even an independent appraisal of the subject item — such tends to maximize price.
Provide as much information as possible? Does it work or not? Does it have any latent merits or defects? What are all the possible uses for this property? How does the market look regarding future values of this type of property? Indeed.
Auctioneers have historically and generally have taken the opposite approach — disclose as little as possible, sell “as is” and “where-is” and burden the buyer with assessing the value. Are we as auctioneers maximizing prices in this fashion? Two Stanford University Nobel Prize winners in auction theory would say we’re not.
It seems more information from the seller(s) to bidders increases confidence in the process and the purchase. Bidders more confident bid more and don’t “scale back” with the fear they are possibly overpaying. What seller doesn’t want to maximize price with empowered bidders?
As well, with increased disclosure, bidders don’t worry that there are other material issues which are not being disclosed. More disclosure — more confidence — helps not only the seller but the auctioneer as well who benefits with more profit and future business.
Disclosure has other merits. Not just more informed bidders, but more bidders — larger crowds and/or the number of bidders registered online. What happens when the bidder pool is expanded? Higher prices in part because people feel better about participating. We discussed this “restaurant” theory here: https://mikebrandlyauctioneer.wordpress.com/2016/05/31/large-auction-crowds-busy-restaurants-and-relevance/.
If you’re an auctioneer, attempt in your next auction to disclose more about the properties you are selling. See if bidders appear to appreciate your efforts and if sale prices exceed your expectations. Paul Milgrom and Robert Wilson might say that you’re moving in the right direction.
Mike Brandly, Auctioneer, CAI, CAS, AARE has been an auctioneer and certified appraiser for over 30 years. His company’s auctions are located at: Mike Brandly, Auctioneer, RES Auction Services, and Goodwill Columbus Car Auction. He serves as Distinguished Faculty at Hondros College, Executive Director of The Ohio Auction School, and an Instructor at the National Auctioneers Association’s Designation Academy He is faculty at the Certified Auctioneers Institute held at Indiana University and is approved by The Supreme Court of Ohio for attorney education.