Integrating auction and search markets: The slow Dutch auction

Abstract

The issue of choosing to sell property by auction or by traditional negotiated search markets is addressed in this article. A general selling institution called the slow Dutch auction is introduced. This general selling mechanism reduces to either a conventional auction, a posted offer, or some time dependent mix of these selling institutions depending on the pricing rule chosen by the seller. We model search by having potential buyers whose private valuation for the property is unknown to the seller arrive randomly over time. With this general framework the seller's problem is to choose a selling mechanism that maximizes expected wealth. Surprisingly, we find that the optimal selling institution is always a posted offer market. The seller chooses an optimal posted price and waits until a buyer arrives who is willing to pay this price. Auctions are never optimal.Key words: Real estate auctions, Search markets, Optimal auctions, Negotiated markets, Posted offer markets, Resolution trust corporation Real estate auctions in the United States have traditionally been conducted for distressed properties. As a result, these auctions are often associated with foreclosures and deteriorating properties. However, there has been much recent interest in real estate auctions as an alternative to brokered markets for nondistressed propreties. Recently, the Resolution Trust Corporation's (RTC) proposal to use auctions to sell residential and commercial real estate acquired through failed savings and loans has sparked much of this debate. There has also been a sharp increase in the number of residential properties sold by auction. Furthermore, auctions are frequently used as an alternative to brokered markets in other countries. For example, auctions comprise about one-half of residential real estate sales in Melbourne, Australia (Lusht, 1990).The use of real estate auctions to market properties raises some interesting issues regarding the relative merits of auctions versus traditional brokered sales. With an auction the seller knows that the property will be sold on a fixed date but loses control over the pricing of the property. By contrast, in traditional brokered markets, the seller retains control over pricing but loses control over the timing of the sale. The present study analyzes which market institution will generate the greatest present value for the seller. Is one institution always optimal, or do there exist conditions that suggest one selling institution is preferred in some situations but not in others?

A comparison of the appraisal process for auction and private treaty residential sales

“…Mayer refers to the auction discount as the cost of liquidity. This argument is also presented by Adams, et al (1992). Mayer (1995) does however acknowledge that his model assumes that a seller cannot adjust the price in the face of two bidders willing to pay the guide price.…”

An Analysis of Residential Auction Sale Prices and Quoted Guide Prices

“…Mayer refers to the auction discount as the cost of liquidity. This argument is also presented by Adams, Kruger & Wyatt (1992). The majority of empirical studies have examined whether properties sell for more or less at auction using a hedonic modeling approach.…”

Optimal Selling Mechanism, Auction Discounts and Time on Market

“…bids are . The buyers' arrival follows an exogenous and homogeneous Poisson process with the rate λ. Adams, Kluger and Wyatt (), Lin and Vandell (), Lin and Liu () and Cheng, Lin and Liu (), among others, use the same arrival process in their models. There are several well‐known properties of a homogeneous Poisson process (see, e.g ., Kao ).…”

“…A pertinent research question is to determine whether there exists an optimal selling mechanism for all sellers (and all buyers) in the real estate market. Adams, Kluger and Wyatt () compare a “slow Dutch auction” (the seller dynamically decreases his or her asking prices) and a fixed‐reservation‐price strategy. They find that the “slow Dutch auction” is never optimal because its present value of expected profit always shows a positive discount to its counterpart's.…”