Originally posted on the course-blog for "Strategic Decision Analysis"
As I had mentioned in an earlier post too, I interned with Manheim auctions during the summer. Prior to that, I also worked on a GMSC project with them in Spring 2010 semester. Although almost whole of the time during these 7-8 months, my work was with the home-office, I got a chance to visit the live-auctions twice. It was a fascinating experience, and you have to be there to believe how exciting an auto-auction can be. Typically, a car gets sold in less than 30 seconds of hitting the auction floor!
Anyways, that’s not the main point of this post. Actually, I want to share something, which I observed multiple times on both occasions and found quite interesting. As I look back now, I know that I can explain in Jedi-terms what was happening there.
Okay.. So here is the sequence of what I often saw:
The seller starts the auction at a particular price. (Let us say $24,000)
Nobody bids.
The seller drops the price successively ($23,000, $22,000, $21,000) till he finds the first bidder, who bids let’s say $21,100
The bids starts coming in now: $21,200, $21,300, $21,400….
You will expect that the upper limit in this case would be $21,900. Right?? After all, the seller didn’t find a single buyer at $22,000. No! Surprisingly, more often than not the winning bid will cross the prices, which originally found no takers! And don’t be very surprised, if in a case like this, the winning bid crosses the seller’s originally asked price.
Two interesting observations here: Normally, in an auction, you will expect the seller to start at his reservation price, and expect the auction to take the action from there. Here, since the seller has the option of lowering the reservation price, you will often see the sellers start from well above their reservation price, as seen in example above. Second observation is even more interesting, the one pointed out in the last step of above sequence.
What exactly is happening here? My guess is that the buyers are simply avoiding the Winner’s curse, or at least minimizing their loss from the same. If they bid at $24,000, and win it because of no further bids, it’s the case of Winner’s Curse. They may feel that they have just bought a lemon, and they don’t even exactly know how much loss this is going to bring to them. However, in case the price is lowered, and the auction-action has brought the latest ask-price to $24,000, they know that at least one other buyer was willing to pay $23,900. So if the other buyer’s estimate was correct, their loss is no more than 100 bucks! So even if the Winner’s curse hits them, it may not be that hard for them!
Specifically at auctions at Manheim, a good number of their buyers bid online through a webcasting channel called Simulcast. These buyers do have factual details about the car, but since they are not present at the auction, they may rely on reactions and bids from the people at the live auction before launching their first bid.
I was trying to find a video on YouTube that illustrates the above phenomenon. Unfortunately, I couldn’t find one. But this one does come close, and will give you a fair idea: Manheim Auction. See the car that comes in at 1:15. Original ask price is $26,500, which quickly drops to $22,000, from where it starts getting bids. Finally, the car is sold for $22,900.