Auction Closing Styles: Who Wins, Who Loses, and Why?

Published by Robert Lifson on Tagged Uncategorized

 The following essay entitled “Auction Closing Styles: Who Wins, Who Loses, and Why?” was distributed in a mass email by REA in 2006. This is an essay relating to how auctions are run. We know it’s really long, and it may not be for everyone, but it generated a lot of positive feedback, has been used a tool for discussion and for reference by auction service providers that found it to have great value, and covers a lot of issues that are rarely covered that are of great interest to both buyers and sellers. We thought it would be valuable to archive this essay for future reference here, and hope it will continue to promote discussion and thought about the auction process.

Auction Closing Styles: Who Wins, Who Loses, and Why?

One of the ongoing areas of discussion regarding auctions is how best to close the auction. There are many different styles of auction closes. Each has its pluses and minuses. Depending on what one values most highly with reference to these plusses and minuses, and whose interests are at stake, different people could prefer different styles of auction closings. The one thing everyone agrees on is that every auction must have a mechanism to allow an orderly close, and one of the functions of every auction style is to provide an orderly close. At Robert Edward Auctions, our goal is to make sure that every lot sells to the person who is willing to pay the most. We believe this is the ideal both for our consignors and for buyers as well. If a bidder is willing to pay the most for a given lot, that person should be the winning bidder for that lot.

Robert Edward Auctions closes all lots simultaneously (Auction Style #1 below).  The following is an outline of the three general styles of auction closings most commonly associated with catalog auctions, and a brief summary of “Who Wins, Who Loses, and Why” associated with each style. (Please note: We recognize that an endless number of minor variations of each auction format exist or can be created, particularly with reference to styles #1 and #3 below).

Auction Style #1) The REA Auction Format: All lots close at the same time. This is the style of auction used by REA. All initial bids must be received by a given time (often referred to as “the witching hour”). The auction for all lots continues after this time, but only for those bidders who have previously bid on the given lot. In this way, on closing day, the field of potential active bidders for any given lot is narrowed down from a cast of literally thousands of potential bidders to a manageable number of bidders (those who have expressed a serious enough interest to place at least one bid on the item at some time during the several weeks the auction has been open for bidding prior to closing day). In this way, bidders are actually rewarded for placing bids. This is unlike Live Auctions or eBay auctions, where bidders are rewarded for not placing bids until the very last second. The early bidding activity encouraged by the REA auction format also has the impact of making serious bidder interest in lots transparent. This, in turn, can make bidders aware of significant interest in a given lot, at times understandably giving some bidders more confidence to bid on a given lot, as well as,  at other times, calling attention to lots that for some reason are being overlooked, thus encouraging more bidding on those lots. As bidders are outbid and declare they are finished with a given lot, they still have time to think, and reconsider coming back in as a bidder. The decision to let a lot go doesn’t have to be made in a split second, after which the opportunity to continue bidding is lost forever. Until the very final closing day of the auction, a bidder can decide they are finished with a given lot, because it just isn’t worth it them, and then, after further consideration, get up the next day, change their mind, and place one more bid. This may have little or no impact on relatively common items, but can be very important when dealing with extremely rare and significant material with an unknown but great value.

Even on the final day of the auction, bidders are not shut out of the bidding process until all lots are closed at the same time, and all bidders are finished bidding on all lots. Each lot in the auction continues to remain open to previous bidders until a given stated time, after which the entire auction is closed without warning at the discretion of the auctioneer. The lack of a precisely known closing time encourages all bids to be placed (rather than a bidder risking the auction closing without having placed a bid that the bidder does, in fact, wish to place), encourages maximum “up to” (or “limit”) bids to be placed (”Honest Auto Bid,” utilized only by REA, is an essential element of this system, allowing bidders to place maximum bids with the knowledge that no one in the world, except the bidder, is privy to the limit of your bid), and encourages call-backs to be requested. Bidders are all on the same playing field and are all armed with all the tools required to ensure that the only reason they do not win a given lot is 1) they don’t want it, or 2) the lot went too high. The auction is not closed until all call-backs are made, and when the auction is closed, the high bidder on every lot is the person who is willing to pay the most. And that’s exactly what auctions are supposed to do.

This system is great for bidders in that every lot goes to the bidder who is really willing to pay the most, and great for consignors in that the process is designed to ensure that each lot is really sold to the bidder who is willing to pay the most. In addition, bidders have also enjoyed the ability to transfer their purchasing power from one lot to another on all lots as they have been outbid on given lots, a process that is only effectively allowed by the REA auction closing style. This naturally promotes higher prices, which is great for consignors, while at the same time allowing bidders to not get shut out, which is great for bidders. Remember: in a Live Auction, all lots are sold in lot number order, one at a time. If a bidder in a Live Auction is interested in Lots #1 through #10, but is most interested in Lot #50, that bidder might not bid on Lots #1 through #10, because the bidder is waiting for Lot #50. Only one bidder can win any given lot. In a Live Auction, if the bidding on Lot #50 goes too high, the bidder cannot go back in time and bid on Lots #1 through #10.  In an REA style auction, it is as if they can go back in time, because Lots #1 through #10 and Lot #50 all close at exactly the same time, so the bidder can still bid on Lots #1 through #10. And that is exactly what bidders do.

When dealing with auctions of many lots involving the same collecting field, such as baseball cards and memorabilia, the ability to transfer purchasing power in this manner is a very powerful force, often resulting in higher prices. This is great for consignors.

With REA’s style of auction, Who Wins, Who Losses, and Why? Consignors win, because all other things being equal (bidder confidence in the auction process, bidder confidence in descriptions, market conditions, catalog circulation, etc) their material will always sell for at least as much and in many cases more than any other style of auction. Some bidders lose because they pay higher prices than they would have paid in an auction with a different style of close, but bidders win also because they are not shut out of the bidding process for lots when one or more lots of primary interest go too high. It may be hard to find a bargain, but if there is something of interest, at least you can definitely get it, if the bidding doesn’t go higher than your bidding limit. Bargains are more likely to be fewer and farther between, which means bargain-hunters may lose out. Winning bidders may have to stay up an extra hour or two to see the auction to its final conclusion, but that is a small price to pay for an orderly close in which no bidder is left thinking “I would have paid more” and no consignor is left wondering “Could I have gotten more?”

Auction Style #2) The “Live Auction”: The “Live Auction” format has many flaws for both bidders and consignors. All lots close individually, one at a time, in real-time order. As noted in the discussion above, if a bidder in a Live Auction is interested in Lots #1 through #10, but is most interested in Lot #50, that bidder might not bid on Lots #1 through #10 at all. If the bidder is outbid on Lot #50, unfortunately the bidder can’t go back in time and bid on Lots #1 through #10. This means that Lots #1 through #10 sell for less than they otherwise would sell for. This is not good for consignors. Also, bidders have to be very nimble to participate in a Live Auction. They either have to be there in person, have a representative bid for them in person, leave their maximum bid with the auction house to execute for them, or, if phone bidding is available, be available by phone during the exact moment that the item comes up for auction. There is no margin for error with reference to time. It’s quick. It’s final.

The Live Auction process communicates no hint of bidder interest or price discovery until the few seconds during which the lot is hammered down. There’s no time to think about whether to go higher. If items are selling for very low prices, there is no opportunity for bidders who are not present to become aware of this and bid accordingly. There is no tomorrow. As anyone who has ever attended a Live Auction knows, most have very few bidders in attendance. Images from movies in which million dollar paintings are hammered down before crowds of thousands are fiction. In the real world, attendance of even a few hundred bidders at a baseball auction is huge and very rare. The very best material can sell for strong prices in a live auction. The Halper Auction (which REA oversaw) is a perfect example of this, and there are certainly others. But if you do not have the most valuable collection in the world like Barry Halper, and you are the consignor of a collection or item in a “Live” auction in which very special auction promotion is not provided and devoted to your item (and it usually isn’t), you almost always need a very strong reserve to ensure that your item will not fall through the cracks and sell for an extremely weak price. This fact is well known and often further contributes to the “Live Auction” being an unexciting buying environment for many collectors. Evidence of this is the many “passed lots” of Live Auctions that do not sell. There is always a special excitement in a live auction when “the big item” comes up, but that excitement is shared by just the few people in the room, and that’s the part of the problem. (Compare this with the thousands of people sharing the excitement of big items online in an REA auction). The “Live Auction” traditionally offers the greatest opportunity for bidders to bid against a secret reserve (which is how almost all “Live Auctions” work).

Live Auctions: Who Wins, Who Loses, and Why? When items have reasonable reserves, there is no better auction format for a buyer to potentially get a bargain. The most dedicated collectors and dealers find “Live Auctions” to offer the greatest buying opportunities. There are plenty of bad deals too, often because of high reserves, so we’re not saying you should go to your nearest live auction and start bidding like a madman! You have to know what you’re doing, and be willing to invest the time and effort to go the auction. Live auctions rarely have ideal catalog descriptions. If you go to the auction and see the items in person, you might be the only one in the world who really understands the condition of an item or even what’s in a given lot. Few people are willing to do this, and those that do are often professional dealers looking for bargains. Who Loses? The consignor loses, because of the lower prices some material sells for. (The collecting world is also rich in stories in which the few serious bidders at a Live Auction get together to not compete against one another as a courtesy, or buy material together to split later, thus depressing price levels further.) Who else loses? Bidders who are outbid on lots and wish they could go back in time and bid more on previously closed lots. Bidders who cannot attend the auction and choose not to bid because they do not feel they are bidding on a level playing field. Bidders who are extremely interested in a given lot but are taken totally by surprise at the high price level of a given item also lose, in that these bidders so often would have adjusted their thinking and continued to bid, possibly even winning the item, if only they were given the time to think about it and perhaps do some quick additional research. Again, the most dedicated, prepared,  professional collectors and dealers are best suited to benefit from the “Live Auction” experience, at the expense of less dedicated bidders and, once again, at the expense of the consignors. 

Auction Style #3) The “Staggered Close” Auction Format: Lots close individually, each on a separate clock. After a specified time each lot is closed individually if a new bid is not received within a small window of time (usually 30 minutes) after the “witching hour” on closing day, and the closing time of each lot is then extended for this same increment of time if a bid is received. This style of auction allows lots to close at different times, with the most hotly contested lots remaining open the latest. At a glance, this style of auction might appear to have much in common with the REA auction style format, but this style of auction, in fact, has a great deal more in common with the “Live Auction” format. With the “Staggered Close” auction format, because lots close at different times, and because the most desirable lots remain open, if a bidder is outbid on a given lot and then wishes to transfer his purchasing power to another lot, in most cases he cannot, simply because (as is the case with the “Live Auction”) the other lots of interest are now closed. For some lots, this factor can mean much lower prices for consignors. Because so many lots are closing at different times, bidders can also find it confusing and challenging to bid on multiple lots, and can sometimes unintentionally get shut out of the bidding entirely on lots which they would otherwise have continued to bid on. Like a “Live Auction,” the auction for some lots may still be going on, but if the lot that you are interested in bidding on is now closed, it doesn’t help you much. And it doesn’t help the consignor either.

 The “Staggered Close” Auction: Who Wins, Who Loses, and Why? Who wins? Bidders who are sometimes able to win lots cheaper win. “Staggered Close” auctions tend to close earlier than REA style auctions by a couple of hours, so some could say that this benefits all participants to that extent, but at great expense to bidders and to consignors. In auctions in which auction house employees, auction house executives, and the auction house itself as an entity are permitted to bid in the auction, those special bidders also have the potential to benefit from the auction Staggered Close auction format, so they also win. Who loses? Bidders who would have bid higher on given lots, but are but are shut out of the bidding process because of the auction format, and, once again, the consignor. (Note: As most bidders know, REA has a strict formal policy regarding executive and employee bidding which reads in part: “Robert Edward Auctions does not have a “house account” and under no circumstances is any executive or employee of Robert Edward Auctions, LLC ever allowed to place bids in the auction.”)

Each of these three styles has its plusses and minuses. Each of these different styles of auctions requires a different level of commitment from bidders.

The Live Auction requires the greatest commitment: Bidders have to attend in person or be available at a very specific time - usually within a specific window of ten or twenty seconds of time. If you are not available, if the bidder cannot make this commitment, if anything goes wrong (a phone call missed, not being aware of the time, an unexpected distraction, human error, etc.), the bidder is out of luck. And so is the consignor.

The Staggered Close Auction requires a more modest commitment than the “Live Auction,” but bidders still have to be on top of the closing of all lots of interest in a very time-sensitive manner, with no margin for error, or you will be shut out of lots of interest.

The REA style of auction requires the least commitment. No lots are going to unexpectedly close on you. Bidders only have to be able to remember the day of the auction. If a bidder can’t remember the entire final day of the auction, that bidder would probably have a much tougher time remembering and being available for the thirty minute window required of the “Staggered Close” auction close or ten second window required of the “Live Auction” format. 

REA enjoys promoting thought about the auction process. We discuss these issues on an ongoing basis, with bidders and with consignors. One quick amusing story to close: Our most vocal critic was always trying to convince us, in a friendly way, to close our auctions using the “Staggered Close” auction format. We patiently explained why we didn’t want to do this, although we understood why he, as a buyer, would prefer it. He was relentless, always debating with us and trying to convince us to change. When he decided to sell his million dollar collection with Robert Edward Auctions, we informed him that we do, in fact, have the programming to provide a staggered auction close for him, and since his consignment was so big, if he wanted his section of the catalog to be handled in this manner, we could accommodate him. The response, sounding like an otherworldly howl by a wounded demon from a scary movie, was hard to even decipher at first but was actually a resounding “NOOOOOOOOO!!!!! ARE YOU CRAZY?” Well, the story speaks for itself. What type of auction format close one prefers depends on what your interests are. The same can be said of all the elements that define a given auction. There is no one right answer. We’re always searching for what we think are the best ways to run our auction, and for us this is an ongoing process. We realize that analyzing details of the auction process is not for everyone, but for those who are interested - especially potential consignors - we hope you have enjoyed reading about it. 

Sincerely,

Robert Edward Auctions, LLC

www.RobertEdwardAuctions.com



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