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Truthful Bidding in English Auctions

https://www.auction.com/blog/going-once-going-twice-sold-how-to-win-an-online-real-estate-auction/ 

      In class, we’ve spent a lot of time discussing dominant strategies for different kinds of auctions. First price auctions, for example, buyers should bid less than their value to ensure payoff is above 0, while truthful bidding should be used in second price sealed bid and VCG auctions. Unfortunately, auctions and situations are not always so easily deciphered and maneuvered. Sometimes, bidding truthfully is a viable strategy in first price strategies, like how this article on housing auctions mention that, “[some buyers] place their highest and best bid early on” and recommend buyers to, “set the maximum amount that you’re willing to pay—and stick to it.”

     There are downfalls to any kind of open bid and timed auctions. One of them, specifically in first price auctions, is a practice called sniping. Sniping is when bidders will wait until the last possible second to submit their bid, disallowing other bidders enough to react. While automated sniping is often prohibited, the actual practice is not. Germany eBay, for instance, attempted to ban it, but the ban was struck down in courts as illegal. 

     The main reason why first price auctions are so popular is that for buyers, they feel like they have more opportunity and control to not only win the auction, but to also acquire the item at a lower price than their true value, and that for sellers, they are able to get a better price as buyers get caught up the competition and its pressures. This is apparent in the housing market. Buyers are more likely to offer higher bids than their true value due to reasons like inexperience (they typically only go through this process only a few times over their lives), pressure (a big decision like a house is life altering), and emotional processes like bidding wars. They are also more likely to overbid because of financing opportunities. Oftentimes, another 10 thousand dollars seems like less relative to total price, or another 5 years to a payment plan. 

     Difficulties like in housing markets and from sniping make bidding true value a plausible strategy, even in first price auctions. For example, a lot of housing auctions are for houses in distress, like tax lien auctions. Buyers for such properties tend to be more experienced in the real estate market, if not professionals themselves. Instead of planning to live in these properties, buyers are often looking for investments like flipping or renting it. For tax lien auctions, for example, it would be either collecting the taxes or foreclosing on the property. This would make their true value in the moment of the auction less than the overall value they expect further down the timeline. Usually these auctions do not have financing options, so there is also less flexibility in budget. There’s less urgency, emotions, and pressure. Sometimes in these situations, bidding true value can often be the most efficient and timely strategy, especially if assessing profit or investment value on a binary scale (you either get the property and make money, regardless of how much, or you don’t).

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