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Sealed Bids for Sealed Deeds

In recent times, the real estate market has been making the switch to incorporating auctions to make sales. Whether it be due to adrenaline-pumped impulse moves, or a need for speed when it comes to land acquisition, auctions seem to get the job done faster and more efficiently. As referenced in the article, this is usually done via first-price sealed bids. All the seller’s information on the item is openly available to the buyers, including a range within which the seller’s true value falls. The auctioneer then accepts all the bids and the highest bidder wins the property.

What is interesting is that when questioned, the auction director interviewed claimed that the option of having a sealed bid does not yield less profit than an ascending bid option because in either case, the buyers can make a fully informed decision. Be this as it may, we have learned the dominant strategy for an ascending bid auction is to continue participating until one’s true value has been reached at which point one should drop out. This means that a buyer in an ascending bid auction would go up to their true value and pay that amount (should no other buyer bid higher). For a first price auction however, the dominant strategy is for the seller to bid below their true value so that, should they win, there will be a net gain. Thus, theoretically, a sealed bid should yield less than an ascending bid auction.

The difference however is might be that the property could be withdrawn from the auction if the bid prices do not meet a reserve price set by the seller (aka the seller’s true value of the property). Perhaps since the buyers know that if their bid is not high enough, no one will get the property, this motivates the buyers to change their strategy such that the bids reflect the buyer’s true values (which are higher and so have a better chance of meeting the seller’s reserve price). Regardless, since the seller never goes home with less than what he/she wanted, the method of auctioning probably becomes less relevant since there will always be profit (or a net of zero).



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