From a seller’s perspective, auctions are good for three things: gathering information about bidders, price discovery and selling things.
An example of gathering information about bidders: A golf merchandise site posts a set of autographed (by Tiger Woods, perhaps) golf clubs for auction. In order to bid, bidders are required to fill out a short form with information about their interests, demographics, contact information and, finally, their bid. The merchant site could easily get a list of 100,000 people with interest in golf. The value of this list in subsequent marketing efforts far surpasses the value of the golf clubs being auctioned.
An example of price discovery: A professional trader of collectibles, say Coca-Cola memorabilia, is interested in getting a handle on the strength of the market and appropriate pricing for a 1953 Atlanta bottle in good condition. The trader posts the bottle for auction and uses the submitted bids to identify possible prices for buying and selling. Sharper Image uses this method to determine prices for items that do not have natural price points.
Selling strategies for these two examples is beyond the scope of this brief summary. This document is focused on strategies for single unit selling.
Single Unit Auctions
The seller must determine the extent to which a sale is required. One extreme is when the seller decides that the item will be sold, best offer taken. Some examples are the IRS auctioning a delinquent taxpayer’s belongings and a new bride auctioning her husband’s bachelor furniture. The other extreme is when a seller is only reluctantly interested in selling, but would sell if the price were right.
The seller must determine the characteristics of typical bidders. Will the bidders be driven by private values or common values? (See the Bidding Strategy section for a discussion of private and common values.)
For required sales, the major auction methods (English, Classic Dutch and Sealed) are effective. The seller should take care that there is no reserve price. This is true whether bidders are driven by private values or common values.
For optional sales with private value bidders, the major auction methods (English, Classic Dutch and Sealed) are effective. The reserve price may be posted or secret.
For optional sales with common value bidders, the major auction methods (English, Classic Dutch and Sealed) are effective. If there is a reserve price, it must be secret.
In most cases, the more bidders, the better. The rare cases when this is not true occur when there are common value bidders that are all known to each other. In all other cases, the seller should seek as many bidders as possible. Because of the common awareness of and bidder familiarity with the English, this is the method of choice to get the maximum number of bidders. Bidders will hesitate to bid aggressively in auctions using unfamiliar methods.
The selection of the auction site to use is another important factor. However, since most sites offer the English method and allow reserve prices, if desired, the method offering is typically not the determinant of auction site. Rather, the number of relevant bidders should be the determinant in auction site selection.
Shill bidding by sellers is unnecessary. It is usually not allowed and possibly is even illegal. Selection of an appropriate reserve price in optional sales should be sufficient to satisfy any minimum price requirement.
The preceding overview assumes “rational” bidders, that is, bidders that are knowledgeable about their situation and their corresponding optimal bidding strategies. When bidders are naïve about their situation and optimal strategies or are emotionally driven, the seller usually benefits. In single unit auctions, the English is most susceptible to emotional bidding behaviors and is used to extract “emotional” valuations.