Bachelor’s thesis about new auction mechanism draws a lot of attention
Thanks to Kas Buunk (22), a fourth-year economics student of Erasmus School of Economics, the way art is auctioned may change radically. Buunk’s research focused on an auction mechanism that is more elegant than successively outbidding one another, but still results in a selling price more or less equal to that of the traditional (English) ascending-bid auction. In his Bachelor’s thesis ‘Dealing with an Auction’ he looked at the optimal auction mechanism for the art dealer.
Kas Buunk compared the classic English auction with the less familiar Vickrey auction. In the Vickrey auction, all bidders submit one bid in a closed envelope and the highest bidder wins. However, he does not pay his own bid, but that of the second-highest bidder. The two auctions are very similar in terms of resulting revenue, though the English auction price may be marginally higher due to the so-called auction fever. According to Buunk, the Vickrey auction suits the art dealer better: “The Vickrey system is no clash of bidders, no hammering, pressing and pushing to the highest price possible. Most importantly, Vickrey is no theatre that exploits the greed and grudge of human nature. Led by a notary, it is an honest and controlled procedure which is a smooth extension of the discretion and alleged courtesy of the art dealer.
Under certain mathematical assumptions, the two auctions lead to the exact same price. Auction fever can result in a higher price at the margin, since the theatre potentially causes bidders to temporarily increase in terms of their valuations. For the very reason that mathematically the prices are alike, arguments regarding behavioral economics make all the difference. The thesis also gave rise to a symposium by Fischer’s Auction, as Buunk’s auction will be called. In the company of academics, entrepreneurs, dealers and auctioneers, the concept is approached from different disciplinary angles. At the symposium Alexander Pechtold, former auctioneer and Dutch parliamentary party chairman of D66 said he loves the theatre that comes with the English auction; the tension in the auction hall, and the feeling of the momentum, in which one can lose oneself in greed. According to Buunk these are precisely the human characteristics an art dealer shouldn’t exploit.
In addition, there is another novelty in Fischer’s Auction. Buunk: “To secure the integrity of the auction procedure and to exclude the possibility of any abuse of information, the entire auction will be led by an independent notary. After the auction we will only be informed about the identity of the buyer and the selling price. In this regard, Fischer’s Auction leaves regular auction houses to fall short, since the auctioneer himself manages commission bids and the notary merely supervises the bidding process in the auction hall. Even in the auction hall, the notary doesn’t have full control; the auctioneer collects the bids and has the power and incentives to create so-called phantom bids that artificially drive up the price.” Furthermore Kas Buunk has come up with the idea to reward the second-highest bidder with half of the buyer’s premium in the form of a voucher for the gallery’s collection, since the second-highest bidder forms the price.