Wine auctions: More explanations for the declining price anomaly

Abstract

Extant research has observed a declining price anomaly in a study of wine auctions, also called the afternoon effect: in sequential English auctions of wine, the price reduces. Previously suggested explanations include absentee bidder effect, option effect with non-decreasing absolute risk aversion, decreasing quality effect, the varying size and quantity effect and the synergy or complementary effect. To this list, we add some economic and behavioural explanations: the diminishing consumer's surplus explanation, the transactions cost of re-trading, the subsequent information explanation, new collusion formation and the loss aversion explanation. The list of effects or explanations is sufficiently long to question whether declining prices are an anomaly.

Acknowledgements

Thanks to Joelle Brouard, Professor of Marketing at the Burgundy School of Business, for indicating the possible interest of the subject area of wine auctions and helping with the final modifications and to the participants of the Bacchus-in-Bourgogne conference in Beaune, France, November 2005 for their comments, particularly to Barry Wright of Brock University, for suggesting that the area of reserve prices may be of possible future research interest. Thanks to the anonymous referee(s) of the Journal of Wine Research for reading the paper and to suggest developments of reasons for developing Internet auctions, illegality of collusions and the role of wine brokers in auctions and to Roxana Bobulescu, Professor of Economics at the Burgundy School of Business for reading through the modified version.

Notes

1. See footnote 9 in “Competitive financing mechanisms: auctions used by federal agencies: HEHS-99-57R”, GAO Reports, 24 February 1999: “Overt collusion may involve direct communication and agreement among bidders and may be illegal. In other cases, bidders might act in a manner that has economic consequences similar to overt collusion but without the attendant direct communication, and thus the action may not be illegal”.

2. Wolfstetter (1996) notes that auction houses lobby for the legality of imaginary bids to counteract the formation of buyers' rings. If all buyers' rings were illegal, they would not need this weapon, but they would still need to prove collusion and enforcement may be costly.

3. According to the Terms of Auction of Apex Properties and Auction: “Pooling: Pooling or bid rigging is fraud and a serious Federal Offense. The auctioneer reserves the right to bid on behalf of the seller/s, when the auctioneers detect or suspect pooling by two or more bidders. Pooling will be prosecuted to the fullest extent of the law”. (See www.apex-auction. com/Terms_of_Auction/page_983881.html).

4. McDonald (2000) indicates that the laws relating to the legality of parallel imports differ from country to country: for example, New Zealand applies the international exhaustion principle whereby once a manufacturer sells his branded good, anyone can trade further in it. The EU uses a regional exhaustion principle to encourage parallel imports within the Member States in order to promote free movement of goods, but it joins the USA to oppose international exhaustion. Developing countries normally favour international exhaustion.