The Quiet Game: Strategies for Sealed-Bid Auctions

Occasionally, storage auctions will be conducted with a different formula: the sealed bid auction.  For good and bad, this style of

Sealed Bid auction

auction lacks the interactive, toe to toe bidding found in a regular, “English auction,” but for the thoughtful, more introverted attendee, sealed bid auctions can allow a moment to analyze the contents of a locker and make a determination based more mathematical, calculated reasoning.

 

SEALED BID AUCTIONS EXPLAINED

As far as storage unit auctions go, The sealed bid auction, also known as a “Vickrey Auction,” is conducted with the same prelimary procedures as a regular one.  Bidders get their private chance to give a unit’s contents an inspection from the outside of the unit only.  Once every contestant has made their rounds, no bidding wars will take place.  Rather, bidders are given an allotted amount of time to write down and discreetly submit their valuation to the auctioneer, one time only.

The unit is awarded to the winner in two different fashions, which the auctioneer should tell you about beforehand.  If not, asking is recommended.

  1. “First Price Sealed-Bid Auction” (FPSBA):  The winner is the highest bidder and pays the seller/facility owner the exact value of their bid, i.e “the first price.”
  2. “Second Price Sealed-Bid Auction” (a.k.a. “The Vickrey Auction”): The winner is still the highest bidder, but is only compelled to pay the value of the bid of the runner-up for the unit.

 

Think of this style just as you would if you were in a classic-style auction and there was only one round of bidding.  Especially because of the surging crowds these days at auctions all around the country, and the consequent, enormously disproportionate bids thrown out by greenhorns, a serious auction goer may be encouraged to stumble on one of these lesser known, silent auctions once in a while.

 

STRATEGIES FOR SEALED BID AUCTIONS

In most cases, if not all, winning bids are binding.  If there is a tie, then a tie breaking, second round of bidding will take place, where the minimum bid is greater than or equal to the initial winning bid amount.

The key difference to sealed-bid bidding strategy is that you can get away with winning units at a much lower price than in English auctions, and also bid at slightly lower than your best guess evaluation.  This phenomenon occurs because bidders tend to be more cautious when their competitors wagers are unknown.

Step one is to use your same market research based evaluation skills to come up with a rough estimate of the unit’s contents, per usual.  Do you see any good condition fridges, furniture, or machinery, like power-tools?  You can bet that that in a sealed-bid auction, if the overall visual contents are largely unknown, bids will significantly plummet.   Sometimes, to as low as 10 or 20 dollars.  If a lockers contents are mostly nebulous, it is a good time to gamble and try to steal one for a very low amount.

Keep in mind, that in a multi-unit or caravan auction, bids tend to be more unruly during the opening rounds, and get more calculated as competitors begin to adjust their strategies based on learning the winning bids.  In other words, they get a much better idea of how conservative or wild their competition is because they know everyone else bid lower than the winning bid, plus the rough value of a locker.

 

A FORMULA FOR SUCCESS

In a First Price Sealed Auction, an individual needs to calculate their bids much more mathematically than in a Second Price Auction.  That is, you always catch a break when you place a winning bid in a Second Price Auction because you always end up paying less than your reservation bid.  As far as First Price Sealed Auctions, Collin Fitzsimmons of E-how.com says it best:

“For first-price sealed bid auctions, the best bidding strategy is not to bid the reservation price, but is to chose a bid that will be equal or slightly more than the reservation price of the bidder with the second-highest reservation price. (Because the second highest reservation price is theoretically the fair market value of a unit) it is never worth paying more than the second-highest reservation price" (parenthesis my own).

In other words, everyone in the crowd will be wagering less at a “FPSA” because there is the overall fear of overbidding, winning the locker, but at the end of the day, losing profit because they overbid just to win.  So, in FPSA’s, it is always smart to bid slightly less than your face valuation, even more dramatically the fewer bidders you are competing with.

Why is that?  Basically stated, winning bids tend to get inflated when a bidder feels threatened by a larger quantity of bids to compete with.  Think about it: you are zeroing in a lucrative looking locker that you want desperately to win, but you have to bid higher than a larger amount of people who have the same goal that you do.

Here is a basic formula that should be most helpful in placing winning bids:

X = [1 – (1/# of bidders)] x perceived value of a Unit, where “X” equals the bid you ultimately place.

Example: You see a unit that looks to be worth about $100.00, but you want to make some money off of it, so you want to steal it for $80.00.  There are nine other bidders present, so 10 total, including yourself.

  1. Calculate the 1/# of bidders, so 1/10 = .1. 
  2. 1 minus .1 = .90
  3. .90 x $80.00 = $72.00
  4. Your bid (X) will be $72.00 when there are 10 bidders present and you know the locker is worth at least 80 dollars. 

Get it?  So, the fewer bidders there are present, the larger the percentage of your maximum reservation bid will be deducted from your actual bid.  In this case, especially if you know the competition is weak, you would be using only 80% of the known value of the unit (i.e. you see two things that you can easily resell for $50 apiece, so $100 in total known value).  In stiffer competition, it would be wise to calculate 100 percent of the total known value into this equation, because you know somebody else will be doing the same thing: calculating their bid to at least break even.

With the surging, neophyte overflow courtesy of the storage auction television takeover, I would recommend getting a few Sealed-Bid Auctions under your belt to see if you fair better than usual, or if it just more your style.  There is much more quality control, even in a large crowd, because bidders are not making ego-driven snap bids found at traditional, English Auctions.  Rehearse this formula, be cautious, strike when the iron is hot, and you will come up with a winning locker, guaranteed, all without uttering a single word!

 

David Gross, SUAL.com Content Writer

 

WEB SOURCES:

1. http://emlab.berkeley.edu/~mcfadden/eC103_f03/auctionlect.pdf

2. http://www.ehow.com/about_5481756_introduction-auction-theory.html

3. http://en.wikipedia.org/wiki/First-price_sealed-bid_auction

 

IMAGE SOURCES:

1. http://www.onlinecharityauctions.net/s/Silent-Auction-Bid-Sheets/images/bidsheets.jpg


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