sellers market

From: Sellam Ismail <>
Date: Mon Mar 22 11:36:10 1999

This is the last I'll have to "say" about this. Form your own

> The Agony of Victory: Online Auctions and the Winner's Curse
> By Bruce Gottlieb
> Online auctions are the Internet flavor of the moment. The best-known
> auction site, eBay, went public in September 1998 at $18 and shot up
> to $47 by the end of its first day. It's now at about $150, which
> means that investors value the company at around $20 billion despite
> only $47 million in sales over the last 12 months. Traditional
> businesses want in on online auctions as well. You have until March
> 21, 1999, for instance, to bid on the pink satin eye mask Faye
> Dunaway wore in Mommie Dearest (current high bid: $650) at
> A technology that allows you to bid on a 1970 Ch\a^teau
> Lafite-Rothschild (, $205) without leaving your study is
> impressive. But it cannot repeal the laws of economics. One such law
> is dubbed the "winner's curse" and holds that the winner of an
> auction almost always overpays. As an understanding of this law
> makes clear, online auctions make the winner's curse even worse.
> Auctions are often thought of as models of economic efficiency,
> uniting buyers and sellers at just the right price to maximize their
> mutual satisfaction, put resources to their highest and best use,
> and so on. But three petroleum engineers writing in the Journal of
> Petroleum Technology explained in 1971 why this is not the case.
> Suppose several petroleum firms are bidding on the drilling rights to
> a piece of tundra. No firm is sure how much oil is underneath the
> property, so they hire a team of engineers to poke at the surface
> rocks and make a guess. The guesses will likely range from too low
> to too high. Some firm's engineer will probably guess right, but
> that firm won't win the auction. The winner will be the firm whose
> engineer was the most overoptimistic. The winning firm won't
> ultimately get as much oil as their engineers promised, meaning the
> firm paid too much. In short, the auction "winner" is
> ultimately a loser.
> This is a particularly clear example because the thing being
> auctioned will have a definite value in the future that is
> unknowable at present. But the winner's curse afflicts auction
> bidders whenever there is uncertainty over the current or eventual
> value of the item on the block. This is true even when bidders have
> no intention of reselling the item and when its innate value seems
> inherently subjective.
> For example, bidders for Faye Dunaway's pink eye mask must make some
> judgment on how much they care about Faye Dunaway. If that were all,
> the winner would likely be the person who cared the most. That would
> be economically efficient in two senses: 1) the utility of Dunaway's
> eye mask would be maximized by placing it with the person who can
> extract the greatest pleasure from it (just as, uncertainty aside,
> the highest bidder for an oil field will be the person who can
> extract the most oil from it); and 2) that person would pay no more
> for the eye mask than the pleasure of owning it was worth to him.
> But the course of love is as uncertain as the petroleum content of a
> pile of rocks. Bidders must also try to guess how much they'll care
> for Faye Dunaway in, say, 10 years. The more you overestimate your
> undying affection, the more likely you are to win the auction--and
> the more likely you are to feel like an idiot in 2009.
> Economists have pointed out that if bidders were truly rational,
> they'd simply reduce their bids to correct for the winner's curse.
> There is even a mathematical proof that a perfectly rational actor
> can avoid the curse. But experimental evidence suggests that even
> experienced bidders don't reduce their bids by enough. For instance,
> a study of oil field auctions shows that even seasoned firms
> typically pay far too much for drilling rights given the amount of
> oil they eventually recover. The same phenomenon has been observed
> when corporate takeover wizards bid on other companies--the "winner"
> often overpays. In other words, oil firms and corporate takeover
> specialists keep on getting burned in auctions but persist in
> bidding too high. They simply don't learn.
> Irritatingly, a rational person who understands the winner's curse
> can't do anything about it so long as the other bidders continue to
> bid irrationally. If you bid rationally (lower), you won't win any
> auctions; if you bid what it takes to win auctions (higher), you'll
> lose money because of the winner's curse. Economist Richard Thaler
> wickedly suggests a solution: Explain the theory to your
> competitors. He posits that this is exactly why the three oil
> engineers published their article explaining the curse in 1971.
> Their hope was to induce other firms to reduce their bids. If so, it
> didn't work, since oil firms continue to overpay.
> Online auctions worsen the winner's curse by increasing the number of
> bidders. The craziest poor sucker in a group of 20,000 bidders on
> the Internet is likely to be crazier than the craziest one among 200
> in a Burbank hotel ballroom. That's another thing that experimental
> economists have confirmed--the larger the group, the bigger the
> winner's curse. There's no satisfactory way to buy rare or one of a
> kind items, but online auctions are a particularly bad method.
> On the other hand, if buyers at online auctions are persistently
> disappointed, it's possible that after a while they'll stop bidding.
> It's also possible that experience will lead them to approximate
> "rationality," and they'll reduce their bids. Either way, sellers
> would find their inflated profits eroded. But auctions have survived
> the winner's curse for millenniums, and even the Internet is
> unlikely to change that.
> To be sure, not all auctions are rip-offs. Remember, there is no
> danger of the winner's curse if you are sure about the value of an
> item to you. In that situation, the auction device serves its proper
> purpose of putting the item in the hands of whoever values it the
> most. For instance, suppose you are buying a Beanie Baby for your
> little brother or a discounted airline ticket to Cabo San Lucas.
> Most folks have a pretty clear idea of how much pleasure they'll get
> from their brother's smiles or a few days of sand and surf. And sane
> consumers won't bid more than these respective pleasures are worth
> to them--meaning that they can't feel cheated.
> The winner's curse also doesn't apply when there are many identical
> items being auctioned off. In those cases, where there is enough
> quantity available to satisfy most bidders, the going price will be
> set by the sensible middle of the pack rather than by the most
> overoptimistic extremist. The leading example of such an auction is
> the stock market. So the winner's curse can't explain the
> extravagant price of shares in eBay itself. Unless, of course, when
> it comes to Internet shares there is no sensible middle. If
> everyone's gone crazy, economic theory isn't much help.
> _______________________________________________________
> SLATE -- your smart take on the week's news, politics, and culture
> (
> Copyright (c) 1999 Microsoft and/or its suppliers. All rights
> reserved.

Sellam Alternate e-mail:
Don't rub the lamp if you don't want the genie to come out.

                  Coming in 1999: Vintage Computer Festival 3.0
                   See for details!
                        [Last web site update: 02/15/99]
Received on Mon Mar 22 1999 - 11:36:10 GMT

This archive was generated by hypermail 2.3.0 : Fri Oct 10 2014 - 23:32:21 BST