Thursday, June 1, 2006

You Can Auction That Rembrandt Online

STANFORD GRADUATE SCHOOL OF BUSINESS—EBay has set the standard for online auctioning, proving that people are willing to buy just about anything over the internet. But the tonier auction houses have been skittish: Can a big-ticket item like a Rembrandt be sold on the web, and can it be sold more profitably than in a live auction? The answer, says John McMillan, is maybe.

Studying high-level auctions, McMillan has observed that it's not so much the cost of the thing that determines whether it can be sold successfully online, but rather the degree to which bidders differ in estimating its true value. Items for which valuations are all over the map are bid on more cautiously and therefore typically sell for a lower price in online auctions, while goods that people are pretty sure are worth their salt drive up bidding competition and attract higher prices online. The trick for auctioneers, research suggests, is to find ways to reassure bidders about the true value of online goods so as to spur them to duke it out more competitively.

McMillan, the Jonathan B. Lovelace Professor of Economics at the Stanford Graduate School of Business, and co-author Eiichiro Kazumori of the University of Tokyo note in a recent study that industry wisdom contending that the internet is bad for selling high-end goods because potential buyers resist bidding big bucks for items they have not seen in person is simply false. "A first printing of the Declaration of Independence sold on for $8.1 million, for example," McMillan says. Ferarri automobiles, baseball cards, and even the entire town of Bridgeville, Calif., have been auctioned on the web for hefty sums.

Selling online versus live indeed has its advantages. Transaction expenses associated with live auctions, such as space costs, employee salaries, and so forth, are eliminated. "The tradeoff, however, is that so far evidence indicates that online auction sales tend to be lower, benefiting winning bidders rather than sellers," says McMillan.

McMillan and Kazumori collected data on live versus online auction sales at Sotheby's in June and July 2002 and found indeed that while the mean selling price in live auctions was just under $19,000, the mean price in online auctions was just under $1,500. Not surprisingly, Sotheby's—which had brokered the firm's online auctions—ended its agreement with eBay in February 2003.

But McMillan argues that Sotheby's acted hastily. "I think they flubbed their implementation," he says. Some expensive art and artifacts, he maintains, can be sold just as competitively online as opposed to offline if they are presented correctly. The key is to rein in the valuation variance.

Sotheby's successfully sold the Declaration of Independence online, McMillan explains, because the document's quality and authenticity could be fairly easily communicated online through photos and descriptions. Full information also tends to be relatively easily conveyed online for items such as prints, photographs, coins, and stamps. But even for less straightforward cases, such as oil paintings and antique clothing, where a buyer can't tell as well online the condition, quality, and authenticity of the canvas or the fabric, an auction house can go a long way toward reassuring buyers to bid less cautiously and within more narrow valuation parameters, McMillan argues.

"One thing they can do is set a price estimate, the way they do in live auctions, which signals to the community the probable value of the painting," he says. The top auction houses, he notes, have built a fairly reliable reputation about valuing goods honestly, and this could help reduce pricing uncertainty in online bidders' minds. Online, Sotheby's skipped this step because it outsourced the management of the auction to eBay, which has a hands-off policy about valuation.

By taking control of the online process, providing detailed documentation for every item up for auction, and by establishing price estimates, Sotheby's and other auction houses could create an online environment much more comparable to a live one. That way, says McMillan, they could benefit from lower transaction costs with little reduction in bid prices.

While Sotheby's may not be sold on the idea, other auction houses may want to consider selling on the internet successfully as a way to break the current duopoly that Sotheby's and Christie's enjoy on the auction scene. Online auctioneers and sellers in general may see in McMillan's research a broader lesson: The more high-quality information you can provide online about a product's look, feel, touch, taste, and smell, the more people will be willing to pay top dollar.

Related Information

"Selling Online Versus Live," Eiichiro Kazumori and John McMillan, Journal of Industrial Economics 53(4), December 2005

Reinventing the Bazaar: A Natural History of Markets, John McMillan, W.W. Norton, 2003

"Economic Insights from Internet Auctions," Patrick Bajari and Ali Hortacsu, Journal of Economic Literature 42, 2004, 457–86

From Manet to Matisse: The Rise of the Modern Art Market, Peter Watson, Random House, 1992

"Auctions and the Price of Art," Orley Ashenfelter and Kathryn Graddy, Journal of Economic Literature 41, 2003, 763–87

"Private Ordering on the Internet: The eBay Community of Traders," David Baron, Business and Politics 43, article 1