The Collegetown Apartment Dutch Auction
It’s about that time of year again. The weather is getting colder, courses are demanding more time and focus, and the anxiety of students who have yet to sign leases for an apartment for the next academic year is reaching an all-time high. It has become an “accepted fact” around campus that if one does not sign a lease before mid-October, he/she will completely lose the opportunity to secure “prime” Collegetown housing. Students desire to move off-campus in order to “test-drive” the even more independent life after college and enjoy Collegetown’s wide array of restaurants and bars, while still being in close proximity to campus in a student-occupied community. Realtors utilize this prominent desire to overcharge for their apartments through what is essentially a modified descending-bid auction, otherwise known as a Dutch Auction (named after the famous flower auctions of this type in the Netherlands).
In a normal Dutch Auction, the seller lowers his/her price from his initial price in small increments until a bidder finally breaks the silence and pays the current price. This is similar to a sealed-bid first-price auction because the item is won by the bidder with the highest bid value, i.e. the bidder that broke the silence. Each bidder’s dominant strategy in this type of auction would be to bid slightly under his/her true value for the item (“shading” one’s bid) to create a positive payout when winning. However, the competition for Collegetown apartments has increased pressure from negotiation with realtors and rushed commitments with future roommates.
With such a high demand for a limited supply of Collegetown apartments, realtors’ goals are not finding tenants to fill their apartments, but to maximize their profits. Their success in overcharging for their apartments relies on the manner in which they receive tenants. Firstly, before they offer tours early in the fall, they set a very high initial price. During tours, they remember to remind students that there are “many” other students interested in the same apartment. This allows them to set up a Dutch Auction without actually decrementing their initial price. The uncertainty from the realtor in combination with the pressure from one’s roommates to sign early (since everyone is worried about not receiving “prime” apartments if they wait too long) changes one’s dominant bid strategy. The stress of these early fall negotiations, that do not allow students very much time to think, either forces students to reassess their true values for a “prime” apartment or accept the negative payout of the realtor’s price minus their initial true value. Thus, the student’s bid strategy changes from bidding lower, as in a normal Dutch Auction, to bidding higher than one’s initial true value in the Collegetown Apartment Dutch Auction.
Ruby Perlmutter of the Cornell Daily Sun suggests that “if students looking for Collegetown housing simply held out until the spring, the whole system could change.” This would allow the students to have all year to think about their true values for apartments, rather than fall to the pressure of signing the first “prime” offer. In fact, the system would return to the normal form of the Dutch Auction with realtors’ decreasing their prices in small increments. If you are one of the students who have yet to sign a lease at this point in time, it would be wise to carefully assess your true values for both a “prime” Collegetown apartment and your alternatives so you can develop a positive bid strategy before diving into the modified Collegetown Apartment Dutch Auction.
Source: http://cornellsun.com/node/48254