Sealed Bid Auctions and Buyer Behavior: Evidence from Scottish Housing Markets

"In Scotland, sellers of houses are typically faced with choosing from one of two pricing systems - offers over or fixed price ñ to market their property and achieve the ""best"" price in the open market. In the offers over system, sellers set a reserve price and interested parties bid through the submission of sealed bids. The highest bid is normally accepted. In the fixed price system, the first written offer to be submitted which matches (or is close to) the list price is typically accepted. We show that informed sellers will select the offers over system because in a competitive situation it generates a higher expected selling price relative to the fixed price system. If we assume that buyers must repeat the search process until they bid successfully, the sealed bid format induces rational buyers to overbid in an attempt to avoid expected future search and transactions costs. Inefficiencies persist because buyers are non-cooperative. Using 15,500 residential sales data between 1998 and 2002, we model the seller's choice of marketing system. Specifically, we estimate a hedonic price function based on transactions under both marketing system acknowledging that the choice of marketing system should be treated endogenously within the empirical estimation. The empirical procedure allows us to compare the price under each system against the unobservable price of each house under the alternate system. From this comparison, we hope to provide additional insights into the selection of and price received under each system. "