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Auctions: Ask and You Shall Receive?

This article talks about the psychology behind auctions, the way in which a seller can initiate an auction to maximize his/her profit. In the previous problem sets from this class, there have been an example where a seller can place a reserve price r on the item that he/she is selling, allowing them to sell their item at the minimum price of r, not selling the item when all the bids are lower than r.

Similarly, though not exactly the same, the way the seller makes “price offers” can affect the way in which an item is sold in an auction. A price offer is the price in which the seller first offers to sell the item, which affects the way in which the value of the item is established in the bidders’ minds. As stated in the article, the traditional belief is that a high first price offer results in a high selling price. This is due to a psychological principal known as “anchoring”, where the opening bid of an item somehow gives people the idea that the item’s value must live up to that opening bid. In other words, the opening bid or price offer sets the atmosphere of the auction, with more or less prestige attributed to the item being auctioned off, depending how expensive the starting price offer is. This interesting bit of psychology in auctions conveys that sometimes, people can be tricked into believing the notion that an item’s price = its value, which sellers can take advantage of.

However, this may not necessarily be true as this is only one aspect in auction psychology, as the idea above assumes that the auction already has a set number of bidders who have already decided to take part in the auction. In real life, the challenge already starts from getting enough people to participate in the auction. For instance, making a high opening price offer can have the opposite of the desired effect by discouraging people from even wanting to take part in the auction. As stated in the article, in an experiment with MBA students, more participants said they would bid in an auction with a starting price of $1 compared to a starting price of $10. There may be some discrepancies depending on how much they value the item being auctioned off, but the general consensus is that an auction with a low starting price attracts more people. And where there’s high traffic, there’s high price. High traffic generally leads to high competition, which leads to higher final price, resulting in a greater profit for the seller.

With such various aspects of psychology being in play, there really is no clear-cut answer in what the best approach is when it comes to deciding the first price offer the seller should make in an auction. However, we can see the underlying principals of human psychology when it comes to auctions, and even network exchanges: more competition = more power. High traffic in auctions cause more competition among the bidders, which gives the seller more power as they get to sell their items at higher final prices. In network exchange, the more neighbors a node has, the more outside options it has, and the outsides options have a greater tendency to compete for sealing a deal with that node. Such rivalry results in the center node with many neighbors receiving a higher profit in the bargain, illustrating the power that comes from having people compete for a bargain with you or your item.

https://insight.kellogg.northwestern.edu/article/place_your_bids

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