Auctioneers as Agents

In traditional auction theory, the auctioneer is usually treated as a non-entity or someone whose incentives are completely aligned with the seller's. In reality, quite frequently that is not the case. Many auctions are administered by third party auctioneers who do not own the product and get a small share of the revenue as a commission. If the auction rules are designed very rigidly, an auctioneer may have little impact on the auction outcome. However, in many real world auctions, auctioneers set the pace of the auction and decide when to end an auction. For example, sellers may advice auction houses on a secret reserve, but frequently auctioneers may have discretion on to what extent they should exercise this secret reserve. When multiple objects are sold in an auction day, auctioneers have discretion on the pace of the auctions. Auctioneers also may decide on the sequencing of the lots to be sold at the same auction. An auctioneer, as an agent, may make decisions that are optimal for him but not the seller who is the principal thus creating a classic agency problem that is common among real estate agents, vehicle inspectors and even physicians. We analyze data from a large well-organized market of tea where auction is used to determine the market price to see how the incentive of the auctioneer affects the market pricing. In these auctions, auctioneers get a small fraction of the revenue as commission. However, some auctioneers also sell tea from gardens owned by their holding company thus pocketing the entire revenue from these lots. We exploit this institutional feature and private information from the seller side that the auctioneers provided us to estimate the impact of the auctioneers' incentives on auction outcomes. We find that auctioneers are more willing to postpone the sale of their own tea to get a higher price. Moreover, they inflate publicly announced estimated value of their own tea. On the other hand, buyers seem to take this inflation of the estimated value into account when they bid for lots owned by the auctioneer. Finally, we find a U-shaped price pattern throught the auction day for a given broker. Auctioneers who also own tea gardens position their own lots to take advantage of this price pattern. Interestingly, when we look at multiple auctions of identical lots that are auctioned off consecutively, we find a flat price pattern as predicted by the auction theory.