New research suggests that auction bids decline with intensity of competition
Researchers from the University of Sydney’s School of Economics have co-authored a new study challenging conventional thinking about auction attendance – with particular bearing on the retail property industry.
Drawing their conclusions from an experiment where nearly 100 adults bid on items of varying value from a toy to a house, the economists suggested that the more bidders there are in an auction, the lower each individual bidder perceives their probability of winning to be. The report, released earlier today, suggests this perception has a demotivating effect on bidder desire to win the auction and to bid higher.
“For most of the items, when the number of bidders increased from three to 12, the average bid declined by around 7 per cent,” said co-author Dr Antonio Rosato from UTS Business School.
“Our findings are consistent with ‘loss aversion’ – the idea that people dislike losses more than they like equal-size gains. More than half of the participants changed their bids in response to an increase in the number of rivals.
“When the number of bidders increase, participants experience this lower chance of winning as a loss and this reduces their willingness to pay,” he said.
With auctions appearing more & more frequently in both Perth and Australia’s other major cities, this news appears particularly relevant as vendors query their agents on the efficacy of auction sales.
Associate Professor of Neuroeconomics Agnieszka Tymula says that these findings could be applicable to many real-life auction situations, including property market auctions.
“In real-life, the auctions that attract many bidders are usually those auctions for better properties – and they will therefore generate higher bids just because the property is of higher quality,” she said.
“Many real estate agents infer from this that more people at an auction, the higher the final bid is going to be, so they try to get as many people as possible to their auction.
“However, our results suggest that this actually plays against them because seeing many competitors at an auction makes bidders submit lower bids on average.”
With auction rates only increasing in the Perth Metro area, it remains to be seen whether bolstered public interest & participation in the auction process will yield higher or lower overall market returns for vendors into 2019.