ECON 550- Case Study 1: Auctions

ECON 550- Case Study 1: Auctions

Auctions have a long history. The first documented cases of auctioning goes as far back as 500 BC in Greece and others believe it goes even further back (Zajicek, 2016). Back then, auctions were used to sell off goods, services, and even people. Like today you can still purchase all of those things – yes even people. It’s a part of reality many don’t wish to speak on but people are still trafficked and sold to this day. Others would say that things such as the NFL and NBA drafts are a form of the auction block which is reference to slaves being sold at auction. While they garner similarities our purpose here is to speak on the varying types of auctions that we use even today. The types covered here are the English, Dutch, Vickery and sealed-bid type auctions.

Let’s start with comparing the English and Dutch methods of auctioneering. An English auction is an oral auction where the auctioneer begins with a low bid. Individuals then increasing bid until there is only one bidder remaining to pay the highest bid (Froeb, 2018). The opposite of that is the Dutch auction. The Dutch auction starts with a maximum bid and bidders bid on a price lower than the maximum stated bid from the auctioneer (McAfee, 2017). The first is much more recognizable if you have ever been on websites like Ebay. From that site, sellers can set an auction as low as zero and have bidders bid for a specific amount of time until the auction is over.

This type of auction aims to make best value for the seller while allowing the bidders to also believe they are paying the best value for the auctioned item. This also makes it quite efficient because the window of opportunity is finite and you either win or lose. Like in the case with Sky Plc being placed in a bidding war between Comcast and Fox. It was decided by Britain’s Takeover Panel that the best way to see who wins a merger with Sky was to have an auction between the two highest bidders (Martin, 2018). The two media giants had 24 hours to see who would acquire Sky. In the end Comcast won that duel, but as one could see auction can be used individuals, groups or companies to try and acquire items at their best possible value in the shortest time period allowable. The English auction proved to be an effective tool in deciding how to proceed with the acquisition of Sky Plc. This setting basically stated, ‘Let the best man win.’

English auctions inherently benefit the buyer more so than the seller but in the case with Sky Plc it would be hard to tell. How many of us would turn down a $39 billion dollar deal? Not many. English auctions allow buyers to purchase based on what they believe the value of the item or service is. Dutch auctions lean toward the sellers as they are the ones that set the value based on what they want to sell it at. So buyers are somewhat at a disadvantage because they are bidding blindly sort of speak. However, if the buyer is buying at what they value it at then no one really loses in this scenario.

Next we have the sealed-bidding in this sense allows potential buyers to submit their bids and once done whomever submitted the highest bid is the winner (McAfee, 2017). Government often use this method as well. Process for the government is much more complex as sufficient time for a solicitation must be made, time for bidders to prepare their bids, time for the government to evaluate those bids and then for whomever to be awarded the contract based on their bid (Compton, 2016). This process is as efficient as it can be for the government but for most this would take long as bidding can last months to years before it is awarded. Sealedbidding in an auction is much shorter what the federal government process.

The Vickery auction method is slightly different from sealed-bidding in that whomever the highest bidder is they actually only have to pay the second highest bid on the item or service (McAfee, 2017). However, the obvious downside here is that the buyer doesn’t actually know if what he or she is paying is the second highest bid or not because they are taking the word of the seller or auctioneer. The biggest disadvantage that I can see with these bidding methods is possible collusion between buyers and sellers. Who’s to say that a group of buyers couldn’t get together to win a contract or item and split the profits with the auctioneer? Or perhaps the auctioneer could lie to buyers in a sealed-bidding auction.

Auctions are used in a variety of ways for many different reasons. One way that much of the world is unaware of is the use of auctioning in e-games. Popular games like World of Warcraft, Diablo and even your mobile games have what gamers call an auction house. This auction allows a player to sell an in-game item for a set amount of in-game currency. Using

World of Warcraft as an example, the auction house has a style similar to Ebay which uses the English auction method. Players place rare or difficult to find items in the auction house and set them for sale either at a fixed price or an auction which encourages bidding. Other games use actual currency for purchase of in-game items. Some would argue that gaming in general is silly and to purchase an in-game item is not a need, but a want. However, for some individuals they actually make a living off of playing video games and may not have time to meet the requirements of finding certain items or skills so the auction place is great place to fulfill that need.

E-commerce widely accepts auctions as method of revenue as well. Ebay began back in 1995 started as strictly an auction style website, but since has evolve to incorporate other methods as well (marketwatch.com, 2019). Other sites like Letgo, Tophatter, Govplanet and even your local and state law enforcement have websites established using the auction method to generate revenue. Since its inception Ebay has steadily grown their revenue with the latest of $10.75 billion in revenue last year (marketwatch.com, 2019). While they have since acquired other companies that contribute to that revenue it wouldn’t be accurate to say that all of that revenue is purely from auctions. Like video games, people can make a living off of sites like Ebay by finding merchandise that people want to buy placing them in a virtual auction house (Ebay) and beginning the process.

There is a more practical application for auctioning. For example, I mentioned state and local agencies conducting auctions. These entities use auction more so to get rid of items that they can no longer store and in the process make a few extra dollars that can go to needed supplies or services. Just about every state has a website where the local law enforcement will place for auction items seized from criminals. These items can range from cars, to furniture, to electronics and surprisingly even weapons. This use of auctioning in this manner isn’t necessarily revenue based but considering that the police will continue to catch criminals it could surely become a secondary source of revenue for them.

Non-profits also rely on auctions as they are a type of company that does not accept income the traditional way through selling a product or service to consumers. They rely on investors, auctions and other forms of revenue generators in order to operate. The biggest advantages to using auctions as a revenue generator can bring in new investors and volunteer, increases networking opportunities and visibility (snpo.org, 2019). This is also a big incentive for anyone contributing to a non-profit as they can use their donation as a tax write off during tax season. Some disadvantages include the amount of time and effort used on auction versus the actual amount of revenue generated. Say for example an npo (non-profit organization) put on a very fancy event excepting to meet a goal of $5 million dollar but only makes $500,000. If the event had cost $500k to put on then that npo essentially just wasted time and resources. The Society for Non-profits also cites weather, competing events by similar organizations, and guest speakers not showing could affect how an auction or event can turn out.

I currently work for the USDA which is a federal government organization. They are not allowed to hold auctions in such a manner as a live auction. However, through the Federal Acquisition Regulation, known as the FAR, they can solicit bidders through the sealed-bidding process as mentioned earlier. I specifically work the Animal and Plant Health Inspection Agency so for our department we could state that we are seeking a retail furniture company to decorate our new office spaces which we plan to move into at the end of this year. Through sealed-bidding we can give companies the perimeters we seek and even the highest amount of money we are looking to spend and when the project should be started and completed. Such specifics can take months to years but in our case we can say that we everything done November so we can move in December. Businesses would then compile the information given and send us their bid which includes that amount they can fulfill the contract. It could be lower or it could be higher than what we initially set but other factors could effect that price adjustment.

I’ve worked with agencies where price is the motivating factor and will usually accept the lowest bid just to save a few dollars. However, over the years I’ve noticed a shift to quality over price. It makes sense, in our case we chose the lowest bid and the furniture falls apart in a few years then we are right back to where started. On the other hand, if we spend a bit more money to get some furniture that will last ten years or more then we made a much better investment with taxpayer money. The value for us is the quality which allows us to better do our jobs on a day to day basis which effect industries like import/export, agriculture and manufacturing.

It’s astonishing how much people around the world actually use auctions as a form revenue generation. Auctions are simple tools that are used in everyday life and many don’t even realize it half the time because we’re so focused on getting the product or service at hand. These different auction types can help buyers and sellers come to a quicker agreement over products and services and allow for the perceived value to come through via that agreement.

REFERENCES

1. Zajicek, C. (2016). The History of Auction: From Ancient Greece to Online Houses. The Telegraph. Retrieved from: https://www.telegraph.co.uk/art/online-auctions/history-ofauctions/

2. Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2018). Managerial economics: A problem solving approach (5th ed.). Boston, MA: Cengage Learning.

3. McAfee, P. (2017). The Ideal Auction – Numberphile. Retrieved from: https://www.youtube.com/watch?v=4kWuxfVbIaU

4. Pfeiffer, T., Seal, T. (2018). Sky Auction is the Biggest Test for 50-Year-Old Takeover Body. Bloomberg. Retrieved from: https://www.bloomberg.com/news/articles/2018-09-

20/sky-auction-is-biggest-test-for-50-year-old-takeover-body

5. Martin, B., Hussain, N.Z. (2018). Rare Auction Showdown Could Decide Fate of Broadcaster Sky. Reuters. Retrieved from: https://www.reuters.com/article/us-sky-plc-ma-auction-idUSKCN1M019O

6. Compton, P.B. (2010). Federal Acquisition: Key Issues and Guidance. Vienna, VA:

Management Concepts.

7. MarketWatch (2019). eBay Inc. Retrieved from:

8. https://www.marketwatch.com/investing/stock/ebay/profile

9. Society for Nonprofits, (2019). Pros and Cons: Special Events. Retrieved from:

https://www.snpo.org/funding/specialevents.php