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AUCTION RESERVES & OPENING BIDS


>Hello Everyone,
>
>Would someone please explain to me the purpose of placing a reserve?
>
>Wouldn't a starting bid at the price one is willing to sell serve the same
>purpose?
>
>I never bid on reserve items and I know plenty of other bidders who don't as
>well.  We simply pass over these auctions.   Ebay even says that most bidders
>prefer starting bids.
>
>Am I missing something?
>
>-Walter

>I always thought that  "reserve" and  "minimum opening bid" were
>exactly same thing.   No?   What's the difference?    Gregory


Hi there:

As it regards Phillips, Sothebys, Christies and Butterfields, "reserves"
and "opening bids" are not the same thing...but on occasion they might be
the same figure.

The "reserve" figure is the lowest amount that the consignor is willing to
accept for the designated object(s) or "lot."  Without a reserve, the lot
could sell for far below the value that the consignor places on the object,
so having a reserve indicates that while the buyer wishes to sell, they are
not prepared to sell at any price.  An "opening bid," is, well, most
typically the opening bid or a figure determined at the discretion of the
auctioneer (to facilitate the commencement of competitive bidding...or
"auction").

There are a handful of reasons why such designations are useful. First of
all, it insures a fair market value for successful absentee bids (i.e., a
bid left by a potential buyer who is not available to participate in the
auction).  For example...

Let's assume the reserve for a given lot is $500 and its estimated value is
$800-1200.  Let's also assume that a buyer who really wants the object but
cannot participate on the day of the auction leaves an absentee bid of
$1000 (meaning that the buyer is prepared to pay up to $1000).  This does
not mean that the buyer pays $1000...and nor is this the opening bid.
Absentee bids are executed one bidding interval past the standing bid. So
if the bidding stopped at $600, this absentee bidder would acquire the lot
at the next bidding interval (either $625 or $650) even though they were
prepared to pay up to $1000.  If there was no one else bidding past the
reserve, the sale would be transacted at the reserve, in this case, $500.

Thus, the auction house maintains a fiduciary responsbility to its bidders.
(At Ebay, if you bid $1000, and the previous bid was $600, $1000 is the new
high bid and someone has to beat it...end of story.)

A secondary reason why the opening bid is not the same as the reserve is a
bit more subtle, but it embraces a notion that's dear to auction houses. It
has to do with the belief that neither the auction house or the consignor
should determine the value of the object being sold.  It's the
*marketplace* that should do so...the auction...and the whims of the
marketplace most often do not coincide with the value a consignor has
placed on his consignments.

In this way, we can quantify the interest level for a given object--even if
it didn't sell.  But if the "starting bid" was made to be the same as the
reserve, and such an offer wasn't made, we are unable to determine just how
much someone was willing to pay for said object...which then fails to give
us a sense of the marketplace.  The monkey wrench in this scenario is that
the auctioneer can bid an item up to a designated reserve--but not further.
However in practice, the auctioneer is unlikely to do so if there is
little interest in said object.

On some occasions an auction house will provide estimates that are far
lower than what they believe the item will sell for (a good example being
the Jackie O. auction at Sotheby's) as this provides an inducement for more
people to participate and get snookered into getting carried away.  This
illustrates yet another reason why the opening bid is frequently much less
than a reserve...the starting low ramps up underbidders. (It's worth noting
that a reserve cannot by law be more than the LOW estimate that's included
in the catalog description.)

There are other complexities worth consideration, but it would be simplist
to sum up as follows: I would heartily recommend that you not stay away
from lots with reserves--as many outstanding deals will be missed--instead,
just attempt to discipline yourself to never offer more than what you
decided would be the most you would pay...BEFORE THE BIDDING REACHES THAT
LEVEL.

I really hope that I've explained this satisfactorily and haven't made it
more confusing. GOOD LUCK!

Darryl



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