I Have My Reservations

Today we delve into the allocation of risk in auctions. There are several tools for risk shifting in an auction. Some of these tools are divisive as hell because discussing them exposes inherent conflicts in the auction process. This dynamic conflict is a feature of the relationship, not a bug. It will never vanish, so there has to be compromise somewhere, and that depends on leverage, like any negotiation.

Leverage begins with an understanding of the players and the tools they have at their disposal. There are three players in the auction game: auction house, consignor and bidder. The most salient feature of their relationships to one another to understand is that actual customer of the auction house is the consignor, not the bidder. Bidders go where the items are if they are properly publicized, but the items are there only if the consignors agree to put them there. Every auction has items that outperform and items that sell below market; within the context of the consignor-auctioneer relationship, letting a lot sell at 25% of market is the worst sort of failure for the auctioneer because an auctioneer who disappoints a consignor is not likely to get another consignment from him.

A smart consignor is aware of the risk of a bad sale and wants to negotiate away as much of the risk as possible. Knocking down the total commission payable to the auctioneer is the obvious way to increase a consignor’s net outcome, so the typical negotiation between consignor and auctioneer focuses on the reallocation of commissions. The ‘rack rate’ for most auctioneers is about 30% of the gross proceeds, divided up into a buyer’s premium of around 20% and a commission of around 10%. This percentage does not vary much across the industry, a classic example of oligopolistic price dependency; the auctioneers do not coordinate per se but are strategically interdependent and tend to watch what each other does and adjust price as a group to match any changes one or a few make.

Since the commission and the buyer’s premium both are paid to the auctioneer from the proceeds of the sale, they are functionally the same, so why split them? If you’ve read me for a while you know my answer: to manipulate consignors. It is a jazz hands misdirect. Labeling 1/3 of it a “commission” and the other 2/3 as a “buyer’s premium” tends to suggest that they are different and that the consignor only pays the “commission” because the buyer pays the “buyer’s premium”. That’s a bullshit framing, but a significant percentage of the public falls for it. Most auctioneers will waive the commission for a decent consignment. If the consignment is a really good one, many auctioneers will also agree to give the consignor a piece of the buyer’s premium. If a consignment is truly marquee, like a T206 Wagner, a smart consignor will negotiate percentages of the total hammer price (the sum of the auction sale price and the buyer’s premium), not the itemization. If I had a Wagner to sell, my demand would be 117% of the total hammer price (i.e., a 3% total commission). On a million-dollar card, there is no reason to give away more of the value.

Negotiating the commission is critical but if a consignor stops there, he bears the risk of a poor sale. The next most obvious way to mitigate risk is to increase the minimum bid to a higher percentage of value, yet this tool is rarely used, and with good reason. Auctioneers believe that the ‘action’ on an item drives up its sale price. There is empirical data to support this, most significantly in a live auction where a frenzy can induce overpaying, but also in online auctions during the overtime period. They offer other tools instead, among them the reserve and the guaranty.

A reserve, broadly speaking, is a bottom limit on what price a seller will accept in an auction. If the bidding on an item is insufficient to meet the reserve, it does not sell. There are two types of reserves: open and hidden. An open reserve is one where you are told up front that the reserve exists and in some cases that it is a specific amount. A hidden reserve is one where the reserve price is not revealed. As a further twist, depending on the laws of the state where the auction is conducted, an auctioneer in one state may be allowed to not disclose whether a reserve even exits, while other states require an open reserve on every lot. For that reason, you sometimes see an auction where every lot says it has a reserve, but the reserve is set at the opening price.

Bidders hate reserves. Bidders are trying to pay the least. Some of us are relentless bottom-feeders who put 200 bids into every auction at the opening to see if we can steal a deal. If there is a reserve, that behavior is negated.

Consignors want reserves. My interest as a consignor is not to sell all my lots at any price, it is to sell those of my lots that can be sold at the most profitable price and to not sell the underperformers for pennies on the dollar.

Auctioneers loathe reserves. While they claim that auction reserves hurt consignors, the empirical evidence is conflicting. Some studies say it does, others say it does not (assuming that the reserve is reasonable). The reality is that auctioneers are businesspeople who want to make money and they only make money if a lot sells. It is to the auctioneer’s benefit to set opening prices at low levels where the lots are all but certain to sell, regardless of whether it loses money for the consignor. Now I am not saying that auctioneers want to fuck over their consignors (the opposite is true with the good ones; they understand the need for repeat consignments), but the tension between consignor and auctioneer means that it is inherently in the auctioneer’s best interest to allow every lot to sell regardless of whether the consignor of the lot suffers a loss as a result.

A guaranty is the bastard child of a reserve. If I have an item that the auctioneer values at $10 million and I want at least $8 million for it, net, I will ask the auctioneer to guarantee my outcome. A guaranty shifts all risk of underperformance to the auction house. The bidders never know there is a guaranty because the item sells for the top bid regardless of whether it meets the guaranty. A bad guaranty can wreck the business, so they are the auctioneer’s last resort to getting an item from a consignor, but some of the larger auctioneers are willing to use them to get extreme items away from their owners. I’ve only gotten a guaranty once. At one National, an auctioneer I’d never used before offered me a guaranty to get me to consign some better prewar baseball cards I’d brought to sell at the show, and he ended up having to write me a check at the end when the cards did not meet the guaranty.

Lotting decisions can just wreck your consignment yet are rarely discussed in negotiations. It should be. Auctioneers do not always lot cards based on what is best for the consignor. Catalog space is expensive, what with printing and mailing costs, so entries into big auctions with printed catalogs are lotted to minimize these costs. Some auctioneers also want to be perceived as players and will try to get a market value of at least a certain amount in every lot. That is why we see a lot of odds and ends clustered together in ‘grab bag’ type lots. The truth is that every big lot of aggregated cards that a bottom-feeder like me buys for resale represents an auctioneer failing its consignor. There should not be enough meat on the bone to let me purchase a lot and quickly flip it profitably. I consigned some cards to a well-known house for sale with the understanding that the cards would be sold as singles in their second-tier online-only auctions. Instead, they grouped my cards into one big lot for the catalog auction. I left a lot of money on the table when the big lot sold for an average per-unit price well below retail. Pisses me off every time I come across one of my items on eBay.

Those are the areas of negotiation; so, who has the leverage?

Twenty years ago, there were relatively few auctioneers and many fewer outlets to sell cards at retail. The major auctioneers could dictate terms to the extent that even the commission was hard to avoid. Given the falling transactional friction to DIY selling and the abundance of auctioneers at all levels of business, I think the balance of power has been shifting away from auctioneers to the consignors. 0% commissions are a more or less permanent feature of the auction landscape. I think we are now seeing a move towards a different allocation of risk. There is so much choice now, and so many ways to sell cards at retail directly, that the auctioneers just do not offer a unique service that justifies them making the consignors of desirable items accept the level of market risk that has been the norm in the past. I expect that consignors who understand the process and the relative desirability of what they are selling will be able to negotiate better terms from auctioneers than had been the case in the past because they can take the items elsewhere and get a better deal. If I am right, we will see more reserves and more guarantees offered.

Betcha never thought that consigning a card could be so much fun. Isn’t the cognitive effort required in Hobby capitalism grand?