It is the quickness of counterbids that triggers a bidding frenzy in auctions, not time pressure, say researchers. The intensity of bidding drives people’s desire to win and willingness to pay, says two researchers from the University of Alberta.
Willingness to pay or WTP is the most a consumer will pay for something. The term contrasts with willingness to accept or WTA, which is the least a seller will sell something for.
Your desire to win will notch up a gear if a competitor counters your bid rapidly. The quickness of their counterbid will probably also increase your willingness to pay for the product on auction. This is what Gerald Häubl and Peter T. L. Popkowski Leszczyc found. They wrote about their study in the Journal of Consumer Research (citation below).
Popkowski Leszczyc is a Professor at the Alberta School of Business Marketing, Business Economics, and Law. Häubl is the Ronald K. Banister Chair in Business and a Professor of Marketing, also at the Alberta School of Business Marketing, Business Economics, and Law.
Bidding against a program
The researchers invited people to become participants in what they believed was a live, campus-wide online auction. However, it was, in fact, a program that opposed people’s bids at various speeds. Therefore, the participants were bidding against a program.
Prof. Popkowski Leszczyc said:
“We found the quickness of being outbid by someone else causes consumers to perceive an auction as being more intensely competitive, which in turn boosts the desire to win and, ultimately, results in an increased willingness to pay.”
If the researchers applied just a time pressure into the experiment, a bidding frenzy did not materialize, Prof. Popkowski Leszczyc explained. The effect also depended on direct competitive interaction with other human bidders and disappeared when the speed of being outbid was determined by, for example, a software agent.
As soon as the participants realized they were bidding against a machine, such as eBay’s proxy bidding machine, the effects vanished, the authors wrote.
The speed of competitor reaction had a strong influence on how much participants were willing to pay for a product. However, it did not influence what they thought about the product’s retail price or objective value, Prof. Popkowski Leszczyc pointed out.
Speed of being outbid and willingness to pay
The authors also noted that the faster people were outbid, the greater was their willingness to pay for the product on auction. This was the case even when there was, for example, just one bidder, and also when there were lots of them.
The researchers say their findings have important implications for those who take part in ascending-bid auctions.
People in auctions should resist the temptation to race to outbid others, Prof. Popkowski Leszczyc suggested.
Slow down your bidding process
Regarding what bidders should do, Prof. Popkowski Leszczyc said:
“You should try to strategically slow down the bidding process so as to ‘cool down’ an auction’s perceived competitive intensity, thus preventing other bidders from getting into a bidding frenzy.”
“Bidders might accomplish this by specifying their maximum willingness to pay by setting a proxy bid and sticking to it.”
“After that, set your limits and walk away. Very often people go back, look and then increase it a little more.”
“Bidding Frenzy: Speed of Competitor Reaction and Willingness to Pay in Auctions,” Gerald Häubl and Peter T L Popkowski Leszczyc. Journal of Consumer Research (2018), ucy056. DOI: https://doi.org/10.1093/jcr/ucy056.