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Auctioneer strategy and pricing: evidence from an art auction

Article  in  Marketing Intelligence & Planning · December 2002

DOI: 10.1108/02634500210450855

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School of Business

DISCUSSION PAPERS
Auctioneer Strategy and Pricing: Evidence from an Art Auction

Clare D'Souza and David Prentice

Series A
01.05 2001

The copyright associated with this Discussion Paper resides

with the author(s)

Opinions expressed in this Discussion Paper are those of the

author(s), not necessarily those of the School, its Departments
or the University
 Auctioneer Strategy and Pricing − Evidence from an Art Auction

Clare D’Souza* and David Prentice+

Abstract

This study examines the role of auctioneer's strategy used in determining pricing
at art auctions. It characterizes the role of auctioneers, prices that the paintings were
sold at and tests a series of hypotheses about their behavior. This is done using pricing
data from an auction of paintings. It examines the relationship between the auctioneer's
estimates and realized prices. It determines whether the auctioneer and the market
evaluate different attributes of different paintings differently and finally, an analysis is
undertaken on the determinants of prices in the art market as suggested by hedonic
regression.

* Dr Clare D’Souza,
School of Business,
La Trobe University Victoria Australia 3086
Email: cdsouza@latrobe.edu.au

+ Dr David Prentice
School of Business,
La Trobe University Victoria Australia 3086
Email: d.prentice@latrobe.edu.au
 Auctioneer Strategy and Pricing − Evidence from an Art Auction

1. Introduction

Auctions are an ancient form of trading, buoyant markets in action and

accounting for a huge mass of economic activity. Auctions are another way of

marketing either single distinctive items such as artwork or multiple units of a

homogeneous item. Most recently they have expanded from being held in traditional

locations to being held over the Internet. However, there has been relatively little work

on marketing in an auction setting. A number of questions from a marketing perspective

are yet to be explored, which includes: Should strategic considerations influence the

estimate of prices the auctioneer provides ahead of the auction? Should the auctioneer

provide other promotional material before the auction? Are there other ways the

auctioneer can design the auction, keeping in mind the consumer’s bidding behavior, to

maximize revenue to the sellers?

This paper characterizes the role of auctioneers and consumers in auctions,

drawing on related literature in consumer behavior, marketing and economics. It

highlights the features of auction design, the role of pricing, particularly when

consumers have imperfect information on the nature of the item for auction, and how

other features of auctions interact with consumer behavior in auctions. It then analyses

the marketing strategy, pricing and outcomes of an art auction.

In the next section, a review is undertaken on previous literature. The data is

introduced and the econometric framework used in the analysis is presented. Then

follows the discussion of the results and finally, the conclusions are stated.

1
2. Previous Literature

Previous literature on auctions is examined for two purposes. First, to provide a

theoretical framework for the empirical analysis and secondly to highlight the gaps in

the existing literature by understanding interactions between consumer behavior and

auctioneer strategies. Lessons are drawn from the large theoretical and empirical

literature on auctions in economics (see Klemperer, 1998; McAfee and McMillan, 1987;

Milgrom, 1989), consumer behavior and marketing. Finally, conclusions are provided

with several issues relevant for our application – the art market.

2.1 Consumer Behavior

This section characterizes the consumer in relation to their participation at

auctions. All participants in an auction place a valuation on all items presented for sale.

How these valuations are formed is important for how effective different auctioneer

strategies are. Therefore, in the first instance a discussion is provided on how to

characterize these valuations and where they come from. Secondly, how participating in

an auction may influence the consumer’s valuation and behavior.

Economic theory has focused on two generalizations about how consumers

value items presented for an auction – the item has a common value or a private value

(Klemperer, 1998; Nanda et al, 1997). The item is said to have a common value if all

consumers place the same valuation on the item when they possess it1. An item is said

to have private value if consumers have different values for the product after purchase

(e.g. Vickery, 1961). McAffee and McMillan (1987) indicate these two cases can be

interpreted as polar cases. In an application, there will undoubtedly be common

components and individual components. What determines the relative importance of

these components? The economics literature generally does not consider this but

2
assumes each person independently forms his or her own valuations, as described

above. At the other extreme are the arguments proposed by Woo (1995) who believes

valuations are largely derived through socialization. For example, how consumers'

perceive a particular artist, will have a positive/negative perception on their artwork.

This is one argument in support of a largely common component in individual

valuations.

However, it is not always appropriate to assume the consumer arrives at the

auction with a fixed valuation of each item for sale. Consumers can face difficulty when

trying to assess value when the object is, for example, particularly complex, or the

consumer has imperfect information on the origins of the object or there are marketing

inefficiencies. The consumer may suggest valuation of an object by using various sorts

of information e.g. the predicted price, or the predicted and actual prices of similar

items. This may affect the valuation of an item of a consumer. Specifically, where the

consumer has imperfect information on the quality of the object, then price may act as a

signal of quality and assist the consumer to form their valuation of the particular item

for sale. Likewise, in an auction, other bids may also reveal information about the

common value of the item and hence influence the valuation for each consumer.

Arguments for price being a critical decision-making factor can also be seen in

much of the theory that can be drawn from consumer behavior. Alternative evaluation is

the third step in a decision-making process and it is the process through which we

compare and contrast different solutions to the same market place problem. To assess

benefits offered by products and services consumers use a range of evaluative criteria

that can be tangible such as price, features, quality, convenience or intangible such as

status, image or feelings associated with ownership or use. Price is for most consumers

1 Even though an item has a common value to all consumers, different consumers place different bids for
the item as they have different information on this value before the item is purchased.

3
and in many buying situations the most significant influencer in the alternative

evaluation (Berkman et al, 1997).

Prices, as discussed above, is just one set of information that the consumer can

use to improve their valuation of the items for auction. Other information may well be

just as important as demonstrated in the work of Monroe and Krishnan (1985) and Rao

and Monroe (1988, 1989). These authors examine the effects of information cues such

as price, on buyer’s perceptions of quality. These studies suggest price is less likely to

have a significant effect on consumer’s perception of quality in the presence of other

attributes and when buyers are familiar with the product or product category.

Another source of information for the consumer is the price history of the item

that may help to define a range of prices for a particular item that is acceptable to

consumers. This will be influenced of course by past purchases, perception of product

benefits and perception of possible product costs based on previous experience

(Berkman et al, 1997). There will be an upper bound on the range of prices i.e. the

maximum the consumer is willing to pay – determined by the consumer’s preferences

and valuation of the item. There may also be a lower bound – especially if the consumer

has imperfect information on the quality of the product. The consumer may be wary of

something that is too cheap!

As well as imperfect information, there may be other factors that influence the

consumer’s valuation of an item – particularly during an auction. Previous research in

marketing has not addressed the conceptual distinction between buyer’s behavior in an

auction and outside of auctions, for example their emotional roles and profiles. From

the consumer’s point of view, there are substantial differences between buying in a store

and buying at auctions, be it on the internet or on the auction floor, and buying at retail

or wholesale. In the case when the product is on the market for a short period of time

4
the environment more closely resembles classic supply and demand, with the buyers

and sellers determining selling price based on a limited supply of goods (Harris, 1981).

In some cases there is no product worth a specific “retail value”. The ultimate price

would be dependent of the extent of bidding. Consumers will also differ in bidding

practices or on the basis of their experience (see Engelbrecht-Wiggans, 1980; Feldman

et al. 1983) Experienced buyers have their own tactics in bidding. It could well be that

some buyers experience an 'emotional risk' while purchasing at auctions based on the

intensity of their perception of the value of the product at that particular time. “Going,

Going, Gone… ”is the phrase for a lost opportunity for both the buyer and the seller.

How do these consumers react under pressure? In the case of the buyer it gives them

that craving of urgency, you either buy it now or you may not get it later. The question

remains whether the characteristics of the consumer, including their emotions during the

auction, systematically affect prices, and auctioneer strategies, or whether they

introduce “noise” into the auction?

2.2 Auctioneer Strategy

There are two components that will be considered here. First, the amount of

information the auctioneer provides before the auction. Second the structure of the

auction itself.

The main piece of information the auctioneer provides before the auction is the

estimated price of the item. The theoretical literature about auctions suggests the

auctioneer’s best strategy is to provide truthful information about the value of the items

being sold (Milgrom and Weber, 1982b). Otherwise buyers find it difficult to make

proper decisions about the absolute price of the item. Feldman & Reinhart (1996)

suggest the gap between the highest bid and the ‘true’ value of the object decreases as

the amount of information available increases. Supporting the theoretical literature,

5
Ashenfelter (1989) suggests that auction houses make an effort to estimate the price that

an item will fetch. Note a unique item normally requires considerable expertise so it is

not unusual to find the auctioneer providing a high estimate and a low estimate in an

auction catalogue. 2

The argument that auctioneers provide unbiased estimates of item values has

received considerable attention in the empirical literature. Ashenfelter (1989), based on

an empirical study of impressionist paintings in London and New York, finds price

estimates are very highly correlated with the actual prices fetched and that they are very

close to being unbiased estimates.

As highlighted by Louargand and McDaniel (1991), this finding runs contrary to

statements from auction house professionals that they consciously give price range

estimates that are biased downwards so to encourage more bidders. Offsetting this is the

need to suggest a high enough price to encourage the owner of the item to present it for

sale. Louargand and McDaniel then argue that competition between auction houses

should then yield efficient price estimates. Their analysis of price estimates and realized

prices in auctions of Americana by Sotheby’s New York auction rooms finds no

significant difference between the estimated selling price and actual selling price. This

suggests that professionals do not underestimate to a significant extent. Ekelund,

Ressler and Watson (1998) in their investigation of the Latin-American art auction find

both that in most cases, actual prices exceeded estimates, but that on average the

percentage bias was positive i.e. Sotheby’s and Christie’s prices were overestimates.

The second main area where auctioneer strategy can influence outcomes is in the

design of the auction. First, there are several different auction formats that can be used

such as the English or ascending price auction, Dutch or descending price auction, first

2 The main empirical work on pre-sale information (beyond prices) is Chvosta, Rucker and Watts (2001)
which considers issues specific to the market they deal with - breeding bulls.

6
or discriminatory price auction and second or uniform price auction. In terms of raising

revenue, the preferred auction depends on the characteristics of the buyers and sellers

(Klemperer, 1998). If both buyers and sellers are risk neutral, then most common types

of auctions yield the same expected revenue for the seller. If buyers are risk averse then

the first price type auction will yield a greater expected revenue.

There are other dimensions of the auction that the auctioneer may shape to

influence the outcome. First, the auctioneer may place rules on the nature of bidding.

The choice of bidding often permits bidders the opportunity to communicate within the

competitive structure of an English auction (Milgrom, 1998). In the case of aggressive

bidding or jump bidding intimidates consumers and discourages competition. Whereas,

open exit bidding does not allow for jump bidding (Milgrom and Weber, 1982a). Here

the auctioneer raises the price incrementally. It is the consumer’s willingness to bid

based on the valuation of the object that determines the ultimate price.

Second, the auctioneer may seek to influence the number of bidders. Wilson

(1977) argues that the greater the number of bidders, the closer the resulting prices to

the actual value of the item. Empirical results of Nelson (1992) and, similarly,

experiments of Dyer, Kagel and Levin (1989), Kagel & Levin (1986), and Battalio,

Kogut and Meyer (1990) indicate positive results between bid levels and the number of

bidders.

Third, artificially, seller bids increase competition, conceals the actual number

of bidders and help to take advantage of affiliated bidding (Mathews, 1983; Milgrom,

1986; and McAfee & McMillan, 1987). Considering this, buyers may tend to over bid,

thus causing price distortions that may not permit accuracy in predicting results. Over

bidding will result in the bid being greater than the consumer’s valuation - known as the

"winner’s curse" and could result in post purchase dissonance. Post purchase dissonance

7
could be experienced when pressure under competitive bidding increases consumer risk

of suffering from the winner's curse. In some instances consumers are unaware of the

winners curse (Bazerman, 2001).

2.3 Art Auctions

Notably, in the market for paintings, bids and offers reflect merit or esteem in

which critics, art historians and connoisseurs hold a work of art. The value which the

market places on works of paintings is consistent with the judgement that is made of

their aesthetic quality, a term used to mean beauty, historical importance or any attribute

other than price (Grampp, 1989). The aesthetic components of a product are a potential

source of pleasure for the consumer (Holbrook, 1995). Though, there are a number of

empirical studies of the arts in general, that covers the definition and scope of consumer

aesthetics (Holbrook 1995; Lombardo 1991 Wohlwill 1981). However, little has been

done by the way of aesthetics and pricing to support theory development and to validate

the implications of those theories.

As the art market becomes more extensive, consumers have more of a choice. A

number of studies have indicated that the salience of specific products benefits or

decision criteria play an important a role in consumer information acquisition,

judgements and choices (Bettman and Sujan, 1987) (Huffman and Houston, 1993;

Wright and Rip, 1980). What instigates buying behavior for particular paintings is still

unknown as much depends on the differences in subject matter; how it is perceived and

the skill and originality is shown. The power to engage the viewer's interests, the name

of the artist, quality of the visual experience or aesthetic merit all dictate different price

ranges. Each work of art is unique in one way or other, perhaps by the way of aesthetic

appeal or age or just the artist's name and that gives the seller of it some power over

price. As Grampp (1989) has suggested the power obviously is greater if there are

8
many rather than few buyers who want it. But buyers usually specialize which limits

the demand for any one work, hence, limits the price setting power of the seller. The

relation between seller and buyer is then a bargaining relation. All that can be said is

that the price will be no less than what the seller will accept and no more than what the

buyer will pay (Grampp, 1989). Consumers have been hypothesized to have strong

exploratory components include risk taking in making product choices (Cox, 1967; Cox

et al., 1999).

However, consumers that consider art as an investment are ready to risk bidding.

In extremes, there are two potential outcomes for art as an investment (Gramp, 1989). If

the art ceases to interest any one it will be discarded. About the art that survives, there

is some but not much uncertainty about its future price. The demand for such art rises

as real income rises, and its price also rises. He further suggests that the better informed

is the art market, the more the price increase is limited by the rate of interest on assets

that are equally risky. What is uncertain is which of the works of art created at any time

will survive to have a price in the future. Experience shows that the longer a work of art

has survived, the more likely is it to survive still longer and the more likely is its price

to be higher in the future than at present. Though Grampp provides an appropriate

understanding on the variability in time and price increases, much of this would depend

on the preferences of buyers and the market trend. In other words, if art would not be

considered as an investment then perhaps high bids would be restricted.

3. The Data and Econometric Framework

In this section we introduce the data used in this study. We use data from one

auction held by a renowned Auctioneer and Valuer in Australia. We combine the

information from the auctioneer's catalogue with a complete set of results of the auction.

9
After discussing the data we introduce the econometric framework within the analysis

will be performed.

3.1 The Data

The auction was arranged as follows. It was of a single, diverse collection of

Australian and European paintings, English and European silver, silver boxes and

jewelry, English and European porcelain, jade, ivory and oriental porcelain and lastly

English and European furniture, lights, clocks, bronzes and books. Besides being

present at an auction bidding could be done via the telephone before the commencement

of the auction or in absentee. All lots were offered and sold on “as is” basis. The highest

bidder is the buyer. A buyers premium of 10% of the hammer price is payable to the

auction house. In this paper, we focus on paintings. 159 of the 160 paintings offered for

sale were sold.

The catalogue does more than just list the paintings for sales and their prices. An

estimated range of prices (maximum and minimum) is provided for each painting. For

some paintings there is also information such as a photograph of the item, the age of the

painting and/or the painter, further information on the painting, including on its

provenance, and previous exhibitions. They also provide information on the authenticity

of the painting. There is not always information on the date of the paintings. There are

two cases. First, there is detailed information on the painter, but not the painting. Where

the dates of birth and death are known, the midpoint is used. Secondly, where the

painter is obscure or the painting is attributed to a school then no age is recorded. It

should also be noted that the catalogue itself is not just a sheet of paper with a list of

paintings and prices. Rather it is a hardbound book with glossy paper and a cloth

bookmark attached. It resembles a coffee table book, but with a few paintings on each

page and with, of course, prices.

10
 Some data on the characteristics of the paintings are summarized below in Table

One:

Table One: Characteristics of the Data

Number of Observations 160
Average Estimate Price (standard 11373.69 (22258.80)
deviation)
Average Price of Sold Paintings (standard 11459.33 (19491.7)
deviation)
Average Age of paintings that can be 83.99 (29.68)
dated. (st deviation)
Number of Oils 98
Number of Paintings Signed 155
(Number of Paintings with) Information Provided in the Catalogue
Literature 16
Provenance 13
Picture in Catalogue 99
Exhibitions 24
Artists with multiple paintings in the AJ Sherman, AT Bernaldo (4), AE
auction (3 unless otherwise stated): Streeton (7), HC Griffith (4), E
Buckmaster, H Heysen, JA Turner (4), R
Chamerski (7), JR Jackson (4), JH
Scheltema, JA Cumbrae-Stewart (4), ME
Rowan, NA Lindsay (4), RW Sturgess,
WB Young, S Long (4), WR Bennett (4),
R Johnson.

3.2 The Econometric Framework

Since we do not have any data on consumer characteristics we focus on

the prices and the strategies used by the auctioneer. The main tool we use for this

analysis is a hedonic regression of the price of a set of paintings on their characteristics

because the realized prices are the result of the valuations of both the suppliers and

demanders, we cannot directly infer consumer valuations of characteristics. The

dependant and explanatory variables are summarized below in Table Two.

Table Two: Dependant and Explanatory Variables

Name Description
Price – Realized Log of realized price
Price – Estimated Log of estimated price (midpoint of range
of estimated prices)
Area Painting area
Watercolour Dummy: D=1 if Watercolour, 0 otherwise

11
Oil Dummy: D=1 if Oil, 0 otherwise
Portrait Dummy: D=1 if Portrait, 0 otherwise
People in Landscape Dummy: D=1 if depicts people in
landscape, 0 otherwise
Landscape Dummy: D=1 if Landscape, 0 otherwise
Cityscape Dummy: D=1 if Cityscape, 0 otherwise
Nude Dummy: D=1 if Nude, 0 otherwise
Flower Dummy: D=1 if Flowers, 0 otherwise
Signed Dummy: D=1 if Signed, 0 otherwise
Dated Dummy: D=1 if Dated, 0 otherwise
Dead Dummy: D=1 if artist dead, 0 otherwise
Age Age, if known (or estimated), 0 otherwise
Number Order in the auction
Literature Dummy: D=1 if literature on the painting
provided in the catalogue, 0 otherwise
Provenance Dummy: D=1 if information on the
provenance of the painting in the
catalogue, 0 otherwise
Picture Dummy: D=1 if photo of the painting in
the catalogue, 0 otherwise
Exhibition Dummy: D=1 if information on previous
exhibitions included in the catalogue, 0
otherwise.
Artist Dummies Dummy: D=1 for each artist with at least
3 paintings in the auction

One common concern with hedonic regressions is multicollinearity between the

explanatory variables. We perform the standard analysis of condition values of the

matrix of explanatory variables to detect potentially problematic multicollinearity (see

Belsley: 1991 for more details). As none of the condition values were over 30 (the value

recommended by Belsley (1991), we conclude multicollinearity is unlikely to be a

problem.

Finally, it should be noted that though 160 paintings were presented for sale at

this auction. 159 of them were sold. For all regressions on estimated prices we use the

160 observations (Sample A). For all regressions on actual prices we use 159

observations (Sample B).

12
4. The Econometric Analysis

As suggested in the previous section we consider two aspects related to auctions

– auctioneer strategies and pricing. In each subsection a set of hypotheses are introduced

and formally tested.

4.1 The Role of Auctioneer strategies in determining prices.

Three strategies by the auctioneer are considered. First, does the auctioneer

provide unbiased estimates of the prices achieved in the auction? Second, does the

information provided in the catalogue systematically affect pricing? Third, does the

ordering of the items reflect a strategic intent?

As discussed earlier, there is a strong theoretical argument that the auctioneer

should provide unbiased estimates of prices to potential bidders but there is only mixed

evidence in support of this. To test if auctioneer provides unbiased estimates of prices

achieved in the auction, we, following Chanel et al (1996), regress the actual price,

denoted P, on the estimated price, denoted Pe. This is referred to as the Basic

Regression. To test unbiasedness, we test if the coefficient on Pe is significantly

different from one. Rejection of the null hypothesis that the coefficient is equal to one

means rejection of unbiasedness. The results of this (and subsequent regressions) are

reported in Table Three:

Table Three: Results of the Test of Unbiasedness

Variable Basic Regression ARMA Regression
Constant 2431.697 2501.335
(685.5821) (1342.781)
Pe 0.8203237 0.8185962
(0.0281106) (0.0200727)
Coefficient on second 0.2025841
order lag in AR (2) (0.0517614)
Durbin Watson Statistic 2.084198

The estimated coefficient on Pe is significantly different from 1, so we reject the null

hypothesis of unbiasedness. Before completely accepting this result, though, we are

13
concerned about serial correlation in the error terms. This could result as consumers use

information from early sales to adjust their estimates. However, using the Durbin

Watson statistic, we fail to reject the null hypothesis of zero first order serial correlation.

We also estimate a correllogram and use a Q-test (Ljung and Box’s variation) to test for

more general forms of serial correlation.

The Q-test (Ljung and Box’s variation) suggests the autocorrelation coefficients

at the second and third lags are significantly different from zero. This is suggestive of

small second order autocorrelation – consistent with bidders bidding against the wind

i.e. overbidding on one item is followed by underbidding on the following item. Second

order serial correlation does not affect the estimated coefficients in the above regression

but it does affect the standard errors. So we re-estimate the basic regression, adding an

AR (2) error. The results are reported in the third column of Table Three. Again we

reject the null hypothesis that the estimates are unbiased.

Chanel et al (1996) also rejected unbiasedness in their auctions. They suggest

this is strategic behavior by the auctioneer to attract buyers and increase competition for

each painting. Strategic behaviour could make sense if auction participants do not go

regularly to auctions. If auction houses systematically underestimate prices, regular

auction goers will learn this and are unlikely to be fooled.

The second auctioneer strategy we consider is if the additional information, such

as the photo of the picture and information on its provenance, exhibitions and other

literature, influences prices. Producing such a fine catalogue undoubtedly increases the

cost to the auctioneer. Indeed the fact that not all items get photos or additional

information suggests some trade off between cost and anticipated benefit is taking

place. So the effects cannot be interpreted as occurring solely on the consumer side.

This has not been tested in previous work on art auctions.

14
 To test this hypothesis we run two hedonic regressions – one including a set of

advertising related variables and the other excluding them. As the second is nested in

the first, we can perform an F-test to test if the additional variables significantly

improve the specification. An extract of the results of the full hedonic regression, with

the Residual Sum of Squares are presented in Table Four.

Table Four: Results of the Hedonic Regression

Variable Coefficient Standard Error
Constant 6.622 0.484**
Area 0.00023 0.0000343**
Watercolor -0.2200 0.2624
Oil 0.1387 0.2334
Portrait 0.3934 0.3766
Person in Landscape 0.3613 0.3050
Landscape 0.3957 0.4167
Cityscape 0.2614 0.3459
Nude 0.6819 0.3626*
Flowers 0.7035 0.3865*
Signed -0.2619 0.3756
Dated 0.2058 0.1549
Dead 0.3128 0.3176
Age -0.0007 -0.0004*
A. Streeton 0.9575 0.3641*
H. Heysen 1.7752 0.4619*
N. Lindsay 1.3747 0.4604*
15 other artist dummies statistically insignificant
Lot Number -0.00002 0.0015
Literature 0.7677 0.2921*
Provenance 0.0502 0.3335
Picture 0.9631 0.2890*
Exhibition 0.3132 0.2354
R 2 73.78 68.02
With Advertising Without Advertising
Variables Variables
RSS 68.77802 86.65303
Test Statistic 7.92*
* 10% significant **5%

The coefficients of the hedonic regression are discussed in more detail below.

But for now we note that the signs and significance of the coefficients are satisfactory as

is the overall explanatory power. For now, the test statistic shows the null hypothesis

that the advertising variables have no significant effect is rejected. As the signs on all of

15
the coefficients on the advertising variables are positive we conclude the effect of

advertising is to increase prices. More information is required to conclude whether the

increase in price is sufficient to cover costs.

The third strategy used by the auctioneer is to order paintings such that prices

fall over the auction. Beggs and Graddy (1997) document this phenomenon for auctions

of paintings at Christies and Sotheby’s and develop a model to demonstrate conditions

under which it maximizes revenue for the seller. However they also note two conditions

under which this result may not occur. First, an auctioneer may arrange items such that

prices rise initially to build excitement. Secondly, an auctioneer may arrange items

considering the tiredness at the end of an auction.

We follow Beggs and Graddy (1997) in first examining the raw data for such an

effect. First, we divide the data according to deciles, as presented in Table Five. The

median and mean estimates and bids by decile are summarized below in Table Five

where the entries in parentheses are standard errors.

In the means, there is a less systematic pattern than the medians. The facts that

the standard errors are so large and that the mean is consistently well above the mean

suggests that the auctioneer has sprinkled expensive items throughout all of the deciles.

This is consistent with desiring to keep excitement in the auction. However the medians

document pretty clearly a broad pattern of rising and then falling, with a bit of a rise at

the end.

The model of Beggs and Graddy (1997) also predicts a decline in the bid to

estimate ratio. However, there is no systematic evidence of this happening.

16
 Table Five
Median Mean Bid-Estimate Ratio
Deciles Estimate Bid Estimate Bid Median Mean
1 2200 1045 2786 2901 0.84 0.92
(2238) (4506) (0.54)
2 7250 4125 14838 13740 1.13 1.14
(25468) (23056) (0.57)
3 11375 10400 35400 25832 0.98 1.28
(46564) (35089) (0.88)
4 5375 7150 11269 14338 1.14 1.30
(14131) (16865) (0.52)
5 6500 6600 14884 14499 0.99 1.19
(21201) (17836) (0.50)
6 1500 2420 8219 8293 1.08 1.35
(15620) (14052) (0.90)
7 3000 3850 4372 4925 1.29 1.54
(4695) (4659) (0.88)
8 5500 6820 16125 21178 1.37 1.64
(22830) (26632) (1.16)
9 1450 1485 2647 4354 1.38 1.38
(3350) (7637) (0.61)
10 775 962.5 3198 5431 1.70 2.00
(4741) (10610) (1.43)
Note: Standard Errors are in Parentheses

The next step, following Beggs and Graddy (1997) is to examine the coefficient

on an order variable in the hedonic regression. If the coefficient is significantly below

zero this suggests some unobservable factor is determining this trend. If this coefficient

is not significantly different from zero then this result is determined by the ordering of

the paintings in terms of their observable qualities.

Examining Table Four we see the coefficient on lot number is not significantly

different from zero. Hence, we conclude that the auctioneer is ordering the paintings in

terms of their quality to achieve this outcome. However, the auctioneer is also mixing in

paintings of higher value. This could be to maintain excitement.

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4.2 Pricing

The second set of hypotheses is connected to pricing. The first two hypotheses

examine the relationship between the auctioneer estimates and realized prices. We

conclude with an analysis of the determinants of the realized prices, highlighted by the

hedonic regression.

The first hypothesis is that the auctioneer forms its estimates more

systematically than the prices achieved in the market – which was proposed in Chanel et

al (1996)

We follow Chanel et al (1996) here. They argue it is likely that experts

providing valuations can provide more systematic estimates – in as far as they are

related to the characteristics of the paintings, and then find evidence in support of this.

We are less convinced by this argument. In practice, multiple experts are often drawn on

to provide forecasts of prices or other economic variables. If enough of the participants

in the auction are informed, then reaching a price comes from a pooling of informed

knowledge. This is offset to a certain extent by the winners curse. But it is not a

foregone conclusion that the valuations by the auction house are going to be systematic.

To test this we follow Chanel et al (1996). This is done as follows. We run

hedonic regressions for both the realized prices and the estimated prices. We then

calculate the ratio of the estimated variances of the residuals from the two regressions.

Both regressions are performed on Sample B. The estimated variances are presented

below in Table Six. To formally test whether the auctioneer or the market make more

systematic estimates of prices we perform a two-sided F-test on the ratio of variances.

The null hypothesis is that the variances are identical across the two regressions. If the

variance from the regression on actual prices is significantly greater, then the auctioneer

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appears to estimate prices more systematically. But if the variance from the regression

on actual prices is significantly lower, then the market yields more systematic estimates.

Table Six Test Statistics for Pricing

Estimated Prices Actual Prices Ratio
Variance 0.5910 0.5638 0.9538

The results of a two-sided F-test, even at 10% significance, are inconclusive.

Unlike Chanel et al (1996), there is no evidence to suggest either the auctioneer or the

market evaluates the information more systematically. Furthermore, it implies that the

variances in the two regressions are identical.

The next question is to whether the auctioneer and the market evaluate different

attributes of the different paintings differently. Because the previous test has shown that

the residuals from the regressions on estimated and actual prices have the same

variance, to test this hypothesis all we do is pool the two regressions, allowing different

coefficients on each variable according to their sample. In particular we go from having

two regressions on 159 observations, each with 37 variables, to one regression on 318

observations, with 74 variables. Then we test if the coefficient for each explanatory

variables is identical across samples. When this was done, none of the coefficients were

significantly different at the 5% level of significance – only two were even significant at

the 10% level. This suggests that the auctioneer and auction participants weight

different attributes similarly.

Finally, we analyze the determinants of prices in this market as suggested by the

hedonic regression. Inspection of Table Four finds only a few variables appear to

determine the price. If a painting is a nude or a flower leads to a higher price but only at

the 10% level of significance. Area of the painting is significantly different from zero

and positive. The age has a negative effect on a painting – perhaps explained by the

relative youth of most Australian painting. Perhaps a quadratic term may be more

19
appropriate. The artist dummies are insignificant – with the exception of the painters

who are (more or less) household names: Arthur Streeton, Norman Lindsay and Hans

Heysen. Advertising has a significant effect with providing a picture in the catalog and

some literature adding considerably to the value.

8. Conclusions

We find in this auction that the auctioneer appears to have systematically

provided downwards-biased estimates of the prices. Placing additional information

(advertising) in the catalogue is associated with higher realized prices. Furthermore, the

auctioneer also orders the paintings roughly by quality. However, we find that the

auctioneer does not price any more systematically (in terms of using information on the

attributes of the paintings) than the market and that the two value different feature of

paintings similarly.

This evidence is significant in several ways. First, unlike other studies, we have

found systematic evidence supporting the anecdotal evidence that auctioneers shade

their price estimates. This may be to attract consumers to the auction. Second, we have

also found that including promotional material is correlated with higher realized prices,

controlling for other features of the painting. A more sophisticated model would be

required for working out the optimal amount of advertising, but this finding suggests

that auctioneers should seriously consider using promotional material as well as pricing

in promoting their auction. Finally, we have found evidence, consistent with other

studies, that auctioneers systematically order their paintings, perhaps to deal with

different consumer states of mind during an auction.

In addition, when considering the determinants of pricing, we found that larger

paintings (of nudes or flowers) that have advertising in the catalogue tend to feature

higher prices. Similarly, while there are premiums associated with painters that are

20
household names – no premiums exist for lesser-known painters. We have considered

the evidence from an auction of paintings and have found mixed evidence that support

auctioneers using strategies highlighted in earlier work. We have also found some

evidence on the determinants of prices of paintings.

Auction data provides a rich source for analyzing consumer behavior, auctioneer

strategy and pricing and auctions. We argue that bidders use information provided by

the auctioneer to determine their bids. Ideally, we would also like to have data on the

characteristics of consumers, and a more complete account of their bidding behaviour so

to enable a more complete analysis of auctioneer and consumer behaviour in auctions.

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