The University of Sydney and University of Technology Sydney (UTS) economists have co-authored a new study challenging conventional thinking about auctions and how it is applicable to real life bidding situations, including property auctions.
The study suggests that the more bidders there are in an auction, the lower each individual bidder perceives their probability of winning, which has a demotivating effect on their desire to place a bid on an auction.
"This is a counter-intuitive finding because usually, auctioneers would assume that the more bidders there are in an auction, the more money they will make—the logic being that the more bidders there are, the more likely it is that there is a bidder with a high willingness to pay for the good," says Agnieszka Tymula, co-author and Associate Professor at University of Sydney's School of Economics. "However, it turns out that there is also a downside to having more bidders—most people bid less."
The researchers' conclusions are drawn from an experiment where they asked nearly 100 adults to bid on items of varying value—including clothing, movie tickets, Bluetooth speakers, and more. On average, the participants bid less in auctions where the number of bidders increased. More than half of the participants who have changed their bids are in direct response to the increase of bidders.
"For most of the items, when the number of bidders increased from 3 to 12, the average bid declined by around 7%," says 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. As the number of bidders increased, participants experience this lower chance of winning as a loss, and this reduces their willingness to pay." Associate Professor Tymula says their 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."
Hopefully, these findings wouldn’t decrease the number of bidders worldwide but on the contrary will further motivate people to bid even more and to get equal pleasure from both online and live auctions, as well.