Opening Bid Strategies in English Auctions

Abstract

Existing residential homes in Norway are sold by English auctions. This provides an exclusive opportunity to examine opening bid strategies for high-valued objects. Using unique data from surveys and auction journals, we find that the direct price effect of a high opening bid is stronger than the intimidation effect. A higher opening bid is associated with an overall higher price premium in OLS and fixed-effects regressions. Our results have implications for both buyers and sellers in situations where auctions and auction-like sales mechanisms are used, and for policy makers regarding auction process rules and market regulations.

Keywords:

• English auction
• ascending-bid auction
• bid strategies
• housing
• real estate auctions

Disclosure statement

No potential conflict of interest was reported by the authors.

Acknowledgements

The authors greatly acknowledge valuable input from two anonymous referees and the associate editor, professor William G. Hardin.

Notes

1 When minimum bid increments are stipulated, strategic bidding here means that bidder A attempts to force bidder B into a position that denies bidder B the possibility of increasing their bid further. See Isaac et al. (2007) for a more in-depth explanation.

2 Vendor bids are not actual bids with the intention to buy, but rather announced bids on the behalf of the seller to indicate that the price is too low and to keep the bidding going. Dummy bids, on the other hand, are false bids to create the illusion of competition, made in collusion with the seller. Such bids are legal in some types of auctions. A counter offer introduces an element of the Dutch auction, as these offers usually lie between the current highest bid and the asking price.

3 The seller can choose a lower bid as the winning bid, but assuming that involved actors are rational, this is mostly irrelevant. Moreover, for some dwellings, members of housing associations with the right of first refusal may decide to use their option of buying at the same price as the highest bid.

4 NOK 1 $\approx$ US$0.11 or €0.10 (exchange rate per January 2020).

5 In the asking price valuation, the interaction variable indicates that the estimated opening bid impact on the price premium is non-positive in auctions with more than six bidders. However, less than 1% of the auctions have more than six bidders. Controlling for outliers by using median regressions and/or truncating the sample shows that the impact is positive within the full range of bidders.