Why auctions are better than fixed-price sale :: Business Line

Picture this. You want to buy a sofa for your house. You can either buy the sofa from a fixed-price shop or you can bid for similar furniture at an auction. Assuming you like the furniture at the shop as well as the one at the auction, which would you prefer — fixed price or auction?

��

If you are typical consumer, chances are you will prefer the auction. The reason is that you may get the furniture at a cheaper price if you do not have competitive bidders and if the reserve price is low. And in the event the auction price is higher, you can always prefer to buy the furniture from the fixed-price shop.

Now, suppose the sofa at the fixed-price shop is Rs 20,000. Further suppose you do not have to pay value-added tax (VAT) of 14.5 per cent if you buy at the fixed-price shop, whereas the auction house will charge you the tax. Will your cut-off price at the auction also be Rs 20,000, inclusive of VAT? Or will you bid for a maximum price of Rs 20,000, not including VAT?

While this answer may not as clear-cut as most other financial decisions, most of us will have cut-off price of Rs 20,000, not including VAT! Why? Buying at a fixed price does not involve any excitement, unlike in the case of the auction process. When you bid at the auction, you are momentarily the “owner” of the furniture. Of course, another eager bidder may outbid you. And when you are outbid, you feel the pain of “losing” ownership of the furniture. This causes you to bid for a higher price… but not more than Rs 20,000; for you are aware that you can buy similar furniture from the fixed-price shop at that price.

ADRENALINE RUSH

The fact that you are involved in the bidding process and the adrenaline rush you get from being the winning bidder makes the purchase even more desirable. And you are willing to pay a small premium, the VAT, to enjoy the adrenaline rush.

It is not just that. Memories of how you won the bid will linger for a while, as you share the experience with your friends. All of this will be obviously missing when you buy furniture from a fixed-price shop, unless you manage to find an antique or rare piece!

It is, perhaps, for the same reason that we prefer to trade shares and buy active funds rather than invest in passive funds. The truth is that we are aroused by active rewards — whether buying at an auction, paying a premium at Ikea to buy build-your-own furniture or trading in stocks!