How Smart Bidders Can Manipulate Massive Auctions

In today’s blog article we take a closer look in the importance of massive auctions and the serious impact they could have on the economy and the worldwide market demand.

But before we begin, an introduction to auction terminology might be required. The Art Dose carries on the Kapopoulos legacy, an auction house that was founded back in 1991. Niki Kapopoulou, our curator and founder, brought up in a family with a long-lasting tradition in the art industry and is very familiar with the interesting parts that surrounds different types of auctions. Taken by Sotheby’s Institute of Art, the following Glossary will help you understand a bit more about the language and the terminology that thousands of people use everyday in auction rooms around the world.

ABSENTEE BID

A method of bidding for those who cannot or do not wish to attend an auction. Absentee bids are also called “written,” “commission” or “order” bids and may be placed by filling out and submitting an Absentee Bid Form, or online.

BID INCREMENT

The amount by which the auctioneer increases the bidding. In general, the auctioneer will request bids of about 10% higher than the previous bid. The figure is generally rounded up or down at the auctioneer’s discretion.

BOUGHT-IN

If there are no bids on a lot, or if bidding does not reach the reserve price, the lot is “bought in,” meaning it is left unsold and remains the property of the owner.

BUYER’S PREMIUM

The amount above the hammer price that is paid as part of the total purchase price.

CONSIGNOR

The owner who is transferring property to an auction house to act as agent on his or her behalf for sale.

ESTIMATE

Each lot is given a low and high estimate, representing the opinion of experts about the range in which the lot might sell at auction. Estimates are based on the examination of an item and recent auction records of comparable pieces. Published in online and printed catalogues, an estimate provides prospective buyers with an important preliminary guide to value and is generally the basis for establishing the reserve price.

FAIR MARKET VALUE

A term frequently used by appraisers referring to their judgment and opinion about an object’s likely sale price if offered by a willing seller to a willing buyer. Since the auction process is open to all bidders, a sale at auction is considered to be a measure of Fair Market Value.

GAVEL

Another name for the auctioneer’s hammer used to close the bidding.

LOT

An individual object or group of objects offered for sale at auction as a single unit.

SELLER’S COMMISSION

A commission paid by the consignor to the auction house, which is deducted from the hammer price. For more info on this subject visit –> Auction Terminology: A Glossary.

Now back to our article. Auctions are good way to efficiently value an asset based on market demand. Most people are familiar with traditional auctions that involve an auctioneer calling out steadily ascending prices, until there’s a single buyer left with their bidding paddle in the air. But there are other types of auctions: those with private bids, those where everyone is assumed in until they drop out, and others where the auctioneer starts at a high price that descends.

Perhaps the most complex form are auctions where assets of different types are bought or sold simultaneously. Researchers from Stanford Graduate School of Business are not only studying the bidding behavior in spectrum auctions, but in some cases, they’ve also helped design the underlying mechanics of these auctions. In a new paper, Jonathan Levin, the dean of Stanford GSB, and fellow Stanford economics professor Andrzej Skrzypacz examine an auction format first used in 2005 and currently in use worldwide.

They found surprising quirks in this type of auction’s format that create major strategic uncertainty and open the opportunity of predatory bidding, with little or no cost to the predator. “There is no perfect design,” Skrzypacz says. “Designing multi-unit auctions is part science, part politics, part art. There are difficult decisions to make, and depending on the goals of the auction, different designs may win.”

THE MEANING OF THE COMBINATORIAL CLOCK AUCTION

Levin and Skrzypacz studied the combinatorial clock auction format after noticing an intriguing trend in these types of auctions: One company would sometimes pay less than competitors, despite winning similar or larger amounts of spectrum.

The combinatorial clock auction format involves an initial multi-round stage of bidders publicly declaring their interest in bundled packages of spectrum at different price points, followed by a second round of sealed bids.

In Switzerland, Swisscom picked up a package for 360 million Swiss francs while their competitor paid 482 million francs for a smaller package of spectrum. Were these apparent anomalies to be expected in an efficient auction with non-uniform pricing, or were they flukes in the system? Or were successful bidders somehow leveraging flaws in the process? “We tried to figure out new properties of the combinatorial clock auction that people were unaware of, and show they’re quite robust, rather than mistakes by bidders that may disappear with experience” Skrzypacz says.

Levin and Skrzypacz found the combinatorial clock auction can be manipulated. Bidders can bid more aggressively or less so, which can result in an inefficient allocation of spectrum and prices that are hard to explain. This discrepancy has to do with an element of the combinatorial clock auction called Vickrey pricing, where the winning bidder doesn’t pay the final price they bid — they pay an equivalent of the second-highest price in a single-unit auction.

Problems might appear in a multi-round auction, where bidders can observe the behavior of their competitors and infer something about their final bids. These elements can create an incentive for predatory bidders with no interest in winning a specific package of spectrum to artificially drive up demand for that package, in hopes that increased bidding activity will cause their competitors to pay more.

Skrzypacz clarifies that the paper’s goal is not to end combinatorial clock auctions, but rather to prompt regulators to think harder about the best format for their specific auction. After all, in auctions where packages are necessary, the combinatorial clock auction could very well be the best available option.

© ORIGINAL ARTICLE BY:
Luke Stangel | gsb.stanford.edu
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