ANALYSIS
ANALYSIS
1. Price discovery, plain and simple
Ordinary markets often suffer from opacity. Prices may be set by dealers, distorted by insider knowledge, or muddied by thin trading. Auctions cut through that fog. By compelling participants to reveal their willingness to pay in real time, auctions uncover“ true” valuations with greater clarity.
Economists call this“ price discovery” and it is one reason why governments from the United States to Chile, China, and India prefer auctions to administrative allocation when awarding scarce resources like telecom licences. The US $ 81 billion raised in the US’ s 2021 5G spectrum auction is an excellent example.
It generated money for the fiscus, for one thing. It also meant that winning bidders, like AT & T, Verizon and T-Mobile, had the comfort of knowing they had laid out a fair, competitive sum for the spectrum, giving the impetus to steam ahead with large-scale investment in towers, antennae, fibre networks, and data centres.
This is exactly how successful South African investors like Albert van Wyk, who built one of the largest multi-let portfolios in Pretoria have scaled from one house to dozens of properties.
Traditional markets struggle to price such expensive, technologically advanced products that go on sale so infrequently. However, an item need not be in the billions-of-dollars range to benefit from an auction. A house or factory has parallels. With years or decades between sales, priced high enough to have an existential impact on a business, these sorts of assets lack easily obtainable( traditional) market prices. Auction markets enable sensible prices to emerge in a rapid process.
Using data from over one million bids covering nearly 200 000 housing transactions in Norway, researchers recently concluded that, among other things,“ relative to one-by-one negotiations … auctions with many bidders are associated with shorter bid-expiration deadlines, shorter intervals between subsequent bids, a lower opening bid, smaller bid increments, [ and ] a reduction in time-on-market.” When time counts, auctions can help.
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