Ea. Greenleaf et al., GUARANTEES IN AUCTIONS - THE AUCTION HOUSE AS NEGOTIATOR AND MANAGERIAL DECISION-MAKER, Management science, 39(9), 1993, pp. 1130-1145
Citations number
17
Categorie Soggetti
Management,"Operatione Research & Management Science
The multimillion dollar price guarantees that an auction house can off
er for paintings have already had a large impact on auction house prof
its, and place new demands on the auctioneer's decision making and neg
otiating skills. Yet auctioneers have not been studied as independent
entities and decision makers. To create a price guarantee, the auction
house and the seller must negotiate both the guarantee amount and the
extra commission the seller pays if the auction price exceeds the gua
rantee. We present a normative model of negotiations and find the fron
tier of guarantee and commission that is the Nash bargaining solution.
We also determine the optimal reserve that the auctioneer should plac
e on guaranteed property. We find that guarantees decrease the auction
house's expected revenue compared to a conventional auction, but do a
llow it to attract business which might otherwise be lost. Guarantees
benefit sellers, increasing the expected value and lowering the varian
ce of their auction revenue. The auctioneer's optimal strategy depends
not only on the distribution of the artwork's auction price, but also
the price it will bring if it fails to sell at auction. In the latter
case the auction house must pay the seller the guarantee and then sel
l the artwork, which it now owns, in a private secondary market where
buyers regard the property as ''damaged goods'' and lower their offers
. Although all points on the frontier produce equal expected revenue,
several frequently used decision making rules suggest that both partie
s may prefer a guarantee arrangement where the seller pays no addition
al commission and the guarantee has the lowest value on the frontier.