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Why Sellers Avoid Auctions: Theory and Evidence

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  • Peyman Khezr

    (The University of Queensland)

Abstract

The theoretical literature suggests that the seller of a unique object maximizes her expected revenue by running a standard auction with an optimally chosen reserve price. However, in reality, there are instances in which sellers decide to accept an offer before the auction starts and cancel the auction. This paper first theoretically investigates the rationale behind this type of behavior and then empirically analyses evidence from real-world auctions. In particular, we suggest that, if some individuals are risk averse—in contrast to the standard auction theory models, in which all parties are risk neutral—then it is possible that accepting a price before the auction maximizes the expected revenue for the seller. Finally, with data on housing market auctions, we show evidence of such behavior and further investigate the implications of the theory.

Suggested Citation

  • Peyman Khezr, 2018. "Why Sellers Avoid Auctions: Theory and Evidence," The Journal of Real Estate Finance and Economics, Springer, vol. 56(2), pages 163-182, February.
    • Handle: RePEc:kap:jrefec:v:56:y:2018:i:2:d:10.1007_s11146-016-9594-8
    DOI: 10.1007/s11146-016-9594-8
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    References listed on IDEAS

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    1. Yuen Leng Chow & Isa E. Hafalir & Abdullah Yavas, 2015. "Auction versus Negotiated Sale: Evidence from Real Estate Sales," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 43(2), pages 432-470, June.
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    4. Stanley Reynolds & John Wooders, 2009. "Auctions with a buy price," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 38(1), pages 9-39, January.
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    6. Maskin, Eric S & Riley, John G, 1984. "Optimal Auctions with Risk Averse Buyers," Econometrica, Econometric Society, vol. 52(6), pages 1473-1518, November.
    7. Timothy Mathews, 2004. "The Impact of Discounting on an Auction with a Buyout Option: a Theoretical Analysis Motivated by eBay’s Buy-It-Now Feature," Journal of Economics, Springer, vol. 81(1), pages 25-52, January.
    8. Xin Wang & Alan Montgomery & Kannan Srinivasan, 2008. "When auction meets fixed price: a theoretical and empirical examination of buy-it-now auctions," Quantitative Marketing and Economics (QME), Springer, vol. 6(4), pages 339-370, December.
    9. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 31(3), pages 129-137.
    10. René Kirkegaard & Per Baltzer Overgaard, 2008. "Buy‐out prices in auctions: seller competition and multi‐unit demands," RAND Journal of Economics, RAND Corporation, vol. 39(3), pages 770-789, September.
    11. Jacob K. Goeree & Theo Offerman, 2004. "Notes and Comments the Amsterdam Auction," Econometrica, Econometric Society, vol. 72(1), pages 281-294, January.
    12. Roger B. Myerson, 1981. "Optimal Auction Design," Mathematics of Operations Research, INFORMS, vol. 6(1), pages 58-73, February.
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    Cited by:

    1. Peyman Khezr & Shabbir Ahmad, 2018. "Anchoring in the Housing Market: Evidence from Sydney," Discussion Papers Series 596, School of Economics, University of Queensland, Australia.
    2. Shi, Song & Zhang, Hong & Zhang, Jun, 2022. "The impact of a home purchase restrictions (HPR) policy on the distressed property market in Beijing," Journal of Housing Economics, Elsevier, vol. 58(PB).

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    More about this item

    Keywords

    Auction; Risk aversion; Real estate;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • R32 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Other Spatial Production and Pricing Analysis

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