Monday, February 11, 2013

Auction Regulation

A recent NY Times article  describes attempts to regulate art auctions so as to protect consumers. Two practices seem rather interesting.

Chandelier Bidding
For two decades some New York State lawmakers have been trying to curb the practice known as “chandelier bidding,” a bit of art-market theater in which auctioneers begin a sale by pretending to spot bids in the room. In reality the auctioneers are often pointing at nothing more than the light fixtures.

Third Party Guarantees
A guarantee typically operates as it sounds. When someone offers a piece for auction, the house will sometimes guarantee that the seller will make at least a minimum amount by arranging with a third party to purchase the work for a specific price, undisclosed to the public, should it fail to sell for more. In exchange for putting up the funds, the guarantor, whose name is also not revealed, gets a cut of any proceeds above the guarantee.
So if a third party commits to a $10 million guarantee, and the bidding reaches $12 million, the third party receives a piece (often 30 percent to 50 percent) of the additional $2 million.

Much like reserve prices, these practices serve to take away some of the risk for the seller. After all, the auction house is hired by the seller to generate as high a winning price as possible. It is important to distinguish whether the goal is to protect consumers from deliberate misinformation, which could make all auctions more efficient, or from high prices, directly at odds of the whole enterprise.

5 comments:

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  3. I found this article to be very interesting as well. My family is very familiar with different types of auctions. From manufacturing, farm equipment and livestock auctions where oral bidding is mostly used, I thought I had heard of all of the auctioneer’s tricks. The description of chandelier bidding was something new and definitely worth doing some research on.

    According to Daniel Grant, John Flanagan, Republican state senator from New York, is trying to pass legislation that focuses on eliminating chandelier bidding from auction houses. (Grant, 2007) Not only is it is unethical action by the auctioneer, it is also affecting the buyers and sellers surplus. Flanagan is trying to mandate auctioneers to present any bids (made directly to the auctioneer or auction house) as an “auction house bid” in efforts to keep auctions more fair and auctioneers more accountable. The article states that no vote has been scheduled for this legislation yet and also notes that this is only one factor of auctions that needs to be more regulated.

    Although I have attended many auctions, the next time I go, I will definitely be paying closer attention to see how honest the auctioneer is. This puts a whole new perspective on the entertainment of an auction.

    References:
    Grant, D. (2007). Legislators Seek to Stop “Chandelier Bidding” at Auction. Retrieved from http://www.artnews.com/2007/09/04/legislators-seek-to-stop-chandelier-bidding-at-auction/

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  4. I have limited experience with auctions. I enjoy the competition and the excitement that comes with winning an auction bid. However, I would advise anyone participating in auctions to become as knowledgeable as possible about the fair market value of the desire as possible. I do realize that this may not always be easily but it may help prevent the winner’S curse. Once, during a traditional auction, I bid on an item aggressively and won the bid war. However, I later learned that the FMV was much lower than my bid. Even though I won the bid, I felt foolish and a bit embarrassed that I had left so much seller surplus on the table. Not to mentioned what the bid did to my bottom line. I recently made a bid on Ebay and felt the seller was upping the bid. The option on the item was “purchase now” at a set price or “best offer”. I went the best offer route and the counter was only $5 below the “purchase now” price. I immediately felt the seller was pushing up the “best offer” price and left the auction. The Federal Commission Law Journal suggests that online auction fraud has increased in recent years. However, several online houses are taking steps to prevent fraud such as “(1) online information to evaluate the safety and reliability of a transaction, and (2) targeted safeguards to protect against unscrupulous users.” (Synder, 2000)

    Synder, J. (2000). Online Auction Fraud: Are the Auction Houses. Federal Commiunications Law Journal, 52(2), 454-472.

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