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Auction Ethics

When is an auction not an auction?

I suggest that it ceases to be an auction, as most would consider an auction, when the owner of a lot bids on his own item. At this point, the owner is trying to manage the ultimate price through his participation, making it an auction in form but a sale in reality. Rightfully, the owner should have advertised the item at a specified price if, in fact, he wants to realize a certain price.

I don't suggest that an owner should give something away; it's the function of a reserve to prevent this from occurring. Once an owner places an item at auction, however, he should then stay out of the bidding and let the reserve protect him from bids that are unrealistically low.

Why do people bid at auctions versus buying from price lists? They're looking for what they consider "a deal," a break in price from normal retail. So somewhere between the reserve price and retail lies opportunity, and this is what makes auctions viable.

Too many auction houses fail to recognize this, either by setting too high a reserve (or estimated price, on which a minimum bid is determined) and/or allowing the owner of a lot to participate. Yet it is the potential "deal" that keeps bidders coming back, which turns (sells) the lots that are up for auction.

Were all lots to sell at retail or higher, the only value to an auction would be the sale of rare items (for which a retail value can't be truly assigned anyway). Both parties involved could be considered "greedy," but it can be an "enlightened self-interest," to use Ayn Rand's phrase. After all, it is this "greed" that makes the transaction possible -- if the item was priced at retail, the buyer may be unwilling to buy, thereby leaving the seller holding an item he wants to sell. So to make this a viable activity, a price needs to be found between the reserve, which protects the seller from an uneven market, and the retail price, which is generally available to the buyer elsewhere but which he may consider too expensive.

Most auctioneers fail to realize that it's imperative that some lots be sold at truly cheap prices, that buyers find occasional "steals" -- because that's what keeps them coming back to bid again. This is the auction equivalent to a casino advertising a big winner on their slot machines, even though the house has roughly a 30% edge, and to a 275-yard drive straight down the center of the fairway for 100+ average duffer at golf.

For these reasons, the market mechanism should be allowed to operate without the owner's participation, since his or her participation diminishes it as a market. If owners don't like the value that auction markets assign to their lots, they should keep them and advertise them with the prices they seek. And those who operate auctions should strive to make this occur by keeping owners out of the bidding process.

A slight different version of the preceding article appeared originally in our Message Board as part of a discussion of online auctions. It is reprinted here by permission of the author.

© 1998 Dave Moorshead

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