World’s First Online Debt Collection Rate Auction
In a press release on July 21, 2016, Best Rate Collections (BRC) announced a new method for companies with prime debt to find the best debt collection agency for them. BRC claims this method will allow companies to receive more of their collected customer debt with less of the company’s money going to a collection agency. You may be wondering how they accomplish this. The method: an open first price auction. When a company wants to do business with the collection agency that will offer them the best rate, BRC will post the parameters of the company’s debt on an auction where agenicies will then bid on doing business with that company (besides the amount of debt and parameters that come along with that, the company’s information is kept private). Contrary to the typical auction, in this case the lowest bids win. The collection agency’s bid is equal to the rate they would offer to the company to take on their debt. You may have notices I wrote “the lowest bids win” rather than “the lowest bid wins”–that is actaully because there are really 5 winners in this auction. After 10 days of bidding, BRC tells the company the top 5 (technically bottom 5) bidders, and from there the company has 30 days to choose which collection agency to go with.
Why does BRC let the company choose from the agencies with the 5 lowest bids rather than just make the company take the agency with the lowest bid? This could be to prevent some potential issues that would come up if the agency with the lowest bid automatically won.
During the 10 days of the auction, the bidding agencies are able to see the current 5 lowest bids. If the lowest bid automatically won, agencies who really want the business will bid lower and lower, and even as low as their true value, ultimately resulting in lower rates for the agencies than if the top 5 won. Since the top 5 bids win, agencies can be comfortable being in 2nd, 3rd, 4th, or even 5th place without being compelled to bid lower than the lowest bid. This means agencies can bid higher than their true value and still win, meaning higher rates for the agencies. In the long run, this helps BRC because if agencies see that even if BRC claims they’re providing companies with the lowest possible rates, agencies know that they can still get off with a rate potentially above their true value as opposed to bidding as low as possible. Once the 5 agencies with the lowest bids are presented to the company, the company can choose which agency to go withbased on other factors in addition to their bid (because the company’s are presented with the agency’s information in the auction, even though the reverse is not true).
Another issue with letting the lowest bidder win automatically is that agencies could collude to drive up rates. Since it is an open auction where agency information is posted and agencies can see the lowest bids, agencies can communicate with each other to agree on taking on certain companies. For example, in the case where the lowest bidder automatically wins, agency A and B can agree that A will take company X and agency B will take company Y. Here, there is no competition and A and B have no reason to bid low, meaning higher rates for the companies (which goes against the whole goal of this auction). This collusion is minimized when the 5 agencies with the lowest bids all win because there is no reason for agency A and B to agree on who gets which company when up to 5 agencies can win. When up to 5 can win, they would both compete for the same companies because even if A has a lower bid than B for company X, for example, company X can still choose agency B over agency A based on other credentials.
This also encourages collection agencies to maintain good reputations and have other redeeming qualities besides being able to provide low rates, because that is what would make an agency with a higher bid get chosen over a company with a lower bid. Overall, the BRC auction and the way it is run benefits the industry for both companies and collection agencies by encouraging agencies to offer low rates but still maintain good service, while conveniently providing companies with the agenicies who have the best rates.
After discussing several types of auctions in class, it was difficult to imagine why such varied types of auctions would be used in practice. At least for me, I admittedly felt second price auctions seemed like the most reasonable auction in any case. However, after learning about BRC’s “open first price 5-winner auction”, it is clear that a potentially modified version of any type of auction could be the most applicable, depending on the situation.
http://www.prweb.com/releases/2016/07/prweb13540915.htm