What Motivates A Bidder? The Debate Over Revealing Auction Reserves

Daniel Grant limns the heated controversy within the auction field over making reserve prices public. On one side is the auction house belief (with the notable exception of Heritage) that public reserve prices are a dis-incentive to bid. After all, they argue, if the minimum price a seller will take is known, the potential buyers will have an unfair bargaining advantage. And what is an auction but a two-, three-, four- or more way negotiation?

What this debate comes down to is whether the auctioneer has discretion over revealing the reserve price. Many dealers resent the practice of “chandelier bidding” — where the auctioneer calls out a bid below the reserve, often pretending it has come from a real bidder, with the hope of stimulating a counter-bid — because they claim it dupes the uninitiated. Dealers like to see works fail on the podium so they can negotiate for a better price after the sale when the seller’s hopes have been brought back to reality. To counter this, many auctioneers will signal that they have met the reserve by announcing “I can sell it.” after a below estimate bid. This often wakes up the somnolent bidders who think they might be able to negotiate after.

So auctioneers want to be able to reveal the reserve price when it suits them. Everyone else wants to know what the minimum selling price is. Here’s what the academics say about why the reserve should be revealed upfront:

“Secrecy in a market prevents the market mechanisms from working as they should,” said William Baumol, a professor of economics at New York University. Put another way, “secrecy keeps you from knowing you’re paying too much,” said Rachel Campbell, an economics professor at the University of Maastricht (the Netherlands) and an adviser to London’s Fine Art Fund, the premier private equity fund in the art investment field. Paul Milgrom, a professor of economics at Stanford University who has studied the auction field, also claimed that knowing a lot’s reserve price in advance “attracts buyers to auctions,” adding that guesswork leads to mistakes and inefficiencies.”

Kathryn Graddy, a professor of economics at Brandeis University and co-author of a 2003 paper “Auctions and the Price of Art” with Princeton University economics professor Orley Ashenfelter, said that “individuals are reluctant to bid on things when they are uncertain about value. Providing more information, such as the consignor’s bottom line, makes people more confident in bidding. I don’t know of any research that anyone has done that says secret reserves are a good thing.”

Should Auction Reserve Prices Be More Transparent? (Gallerist)