Bidding Strategy at Ordinary Auctions

FOR many commodities of substantial proportion-and in some cases a growing proportion-of the quantity handled passes through ordinary auctions. This is notably true in the United States for masterpieces, used furniture, eggs, tobacco, a wide variety of fresh fruits and vegetables, and almost all kinds of livestock. What distinguishes an ordinary auction from other transaction systems is its provision for all parties on one side of the market-usually the buying side-to make improvable, public offers directed seriatim to members of the other side, who may be passive in the process of price formation. When a succession of lots is to be sold, the task of a prospective buyer is quite complicated. If he is not careful, he will fail to take advantage of knowing that the quantity he buys affects his average cost, and even impose almost perfect price discrimination on himself. Virtually nothing has been written about how professional buyers do or should choose their bids. The purpose here is to indicate actual bidding techniques, to derive a formula for choosing an optimum upper limit, and to assess the feasibility of monopsonistic bidding in practice. These issues are not only interesting in themselves, but also are prerequisite to developing one part of an empirically relevant theory of price. This is the part pertaining to successive progressive auctions, predicting for that transaction system how demand and supply will interact and what the trading outcome will be-not if there is recontract, but in fact.