Bidding Strategies at Auctions for Residential Properties

This paper examines bidding strategies at auctions for residential property market sales in Dublin, Ireland during the property boom of 2004 to 2005. At that time, sales of properties through the auction mechanism was more common for premium properties. In the case of properties sold through auction, the form adopted was the first-price English method. English auctions are marked by discrete increases in bids. The auctioneer raises the price incrementally and each participant chooses whether to stay in or drop out of the auction. This study sets out to compare bidding strategies of first bidders to those of snipers. (A “sniper” is defined to be a late bidder at the auction; who does not bid until only one remaining bidder is left.) This paper also examines how behavioural biases (such as “escalation of commitment”) influences the behaviour of bidders at these auctions. Actual bids can signal that an item’s true value has not been reached (Kagel, 1995) and increased bids by others can cause other to copy. In other words, bidders use traffic as an indication of value, and more traffic implies higher value. This is consistent to Shiller’s (1990) theory on a shortage illusion. Similar to bluffing in a poker game, a sniper strategy can serve the purpose of signalling an aggressive strategy, sending the message “Don’t continue bidding as I am going to keep bidding higher”. This message discourages competition for two related reasons: it suggests that the sniper bidder values the property more than anyone else, and also if the aggressive bidder drops out at any stage it implies that the other bidder has overbid for the item. Our results show that snipers are more successful at auctions in terms of winning more auctions and paying lower prices than first bidders. In summary, our results suggest that sniper bidders in residential house auctions are suggestions of keen strategies.