When Maths hits Art
I received an email from a colleague yesterday asking me when I was next taking a flight. He had an article he wanted me to read and, being slightly light in the brain department, I would need time to digest it.
Fortunately one of daughters came home from school ill last night so I am under house-arrest, waiting for her to recover.
Time to strap on my brain and tuck in.
The article articulates exactly what I have been floundering over the years to explain to my clients. It is so pithy and so on the nail that I quote it directly here:
The marketing and economics literature on auction outcomes is extensive. Final sales prices have been studied as a function of various reference prices… sellers requesting higher minimum bids [usually as a reserve] created auction environments that discouraged bidders from entering into the bid. As a result, fewer bidders participated, resulting in less competition. With no driving force toward higher sales prices, the auctions yielded lower expected profits, compared to the profits obtained when lower minimum bids were posted. Lower minimum bids provide lower barriers to entry which encourages more participants to bid. Economists have always maintained that more bidding participants yield greater competition, which therefore result in relatively higher final sales prices (Levin & Smith 1996)*
Why is this important? Well, from a moral point of view it is comforting to think that the pricing model I have been recommending to vendors has some basis in science. That helps alleviate my sleepless nights. But it is also highly valuable information for everybody in our business. We have competitors who seem almost to estimate ‘high’ deliberately, believing that they can always sell the violin another time once it had failed the first**. It seems unduly cynical and – as I now know – flies in the face of the maths. Oddly that doesn’t make me feel better at all – it saddens me.
*A Network Bidder Behavior Model in Online Auctions: A Case of Fine Art Auctions: M. Dass, Srinivas Reddy, Dawn Iacobucci
** … She [Jap 2002, 2007] watched price drops as they occurred throughout bidding periods. She found that when prices dropped a lot, bidders experienced diminished satisfaction, even though bidders should recognize the greater economic savings. The dissatisfaction was attributed to the implication that the early prices were too high.
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