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Combining Buy-In Penalties with Commissions at Auction Houses

Author

Listed:
  • Eric A. Greenleaf

    (Stern School of Business, New York University, New York, New York 10012)

  • Atanu R. Sinha

    (The Anderson School of Management, University of California, Los Angeles, California 90095)

Abstract

Most auction sellers consign property to auction houses rather than holding the auction themselves. In addition to charging sellers a commission on property that sells in the auction, many auction houses also specify buy-in penalties in auction contracts. This is an amount the seller must pay the auction house if the property fails to sell at auction. An important managerial question for auction houses is whether and when buy-in penalties can increase revenues of the auction house, seller, or both, and what combinations of commission and buy-in penalty to use. We show that auctions which combine buy-in penalties with lower commissions Pareto-dominate auctions that use only commissions. This strategy motivates the seller to set a lower reserve, which creates a surplus in auction revenues that can go to one or both parties. This strategy is Pareto-dominant even if the auction house and the seller are uncertain about the number of bidders at the auction, or the auction house is uncertain about the seller's own valuation for the property, at the time the buy-in penalty, commission, and reserve are contractually set. We also discuss the incentive issues raised by this strategy.

Suggested Citation

  • Eric A. Greenleaf & Atanu R. Sinha, 1996. "Combining Buy-In Penalties with Commissions at Auction Houses," Management Science, INFORMS, vol. 42(4), pages 529-540, April.
    • Handle: RePEc:inm:ormnsc:v:42:y:1996:i:4:p:529-540
    DOI: 10.1287/mnsc.42.4.529
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    Citations

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    Cited by:

    1. Engelbrecht-Wiggans, Richard & Nonnenmacher, Tomas, 1999. "A Theoretical Basis for 19th-Century Changes to the Port of New York Imported Goods Auction," Explorations in Economic History, Elsevier, vol. 36(3), pages 232-245, July.
    2. Song Yao & Carl F. Mela, 2008. "Online Auction Demand," Marketing Science, INFORMS, vol. 27(5), pages 861-885, 09-10.
    3. Ernan Haruvy & Peter Popkowski Leszczyc & Octavian Carare & James Cox & Eric Greenleaf & Wolfgang Jank & Sandy Jap & Young-Hoon Park & Michael Rothkopf, 2008. "Competition between auctions," Marketing Letters, Springer, vol. 19(3), pages 431-448, December.
    4. Marie BLUM, 2021. "Auction hosts: are they really impartial?," Working Papers of LaRGE Research Center 2021-09, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
    5. Martin Spann & Robert Zeithammer & Marco Bertini & Ernan Haruvy & Sandy D. Jap & Oded Koenigsberg & Vincent Mak & Peter Popkowski Leszczyc & Bernd Skiera & Manoj Thomas, 2018. "Beyond Posted Prices: the Past, Present, and Future of Participative Pricing Mechanisms," Customer Needs and Solutions, Springer;Institute for Sustainable Innovation and Growth (iSIG), vol. 5(1), pages 121-136, March.

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