Three Essays Related to Real Estate Auctions

This dissertation comprises of three essays related to real estate auctions:The first essay examines the increase in number of bidders on bidding behavior. In a standard auction, bidders bid more aggressively when the number of bidders increases. However, Krishna and Rosenthal (1996, Games and Economic Behavior) show that when bidders have multiple-unit demand that generates positive synergies, bidders bid less aggressively as the number of bidders increases. The first objective of this essay is to offer experimental evidence to support this seemingly counter-intuitive theoretical prediction. We design a simultaneous second-price sealed-bid auction for two objects with two types of bidders: Local bidders with single-object demand and global bidders with multiple-object demand. Our results show that bidders bid less aggressively with increased competition. The second objective is to investigate the effect of offering bidders with multiple-unit demand the option of bidding for both objects as a package as well as submitting individual bids for each object. We find that offering this package option increases allocation efficiency and sellers revenue.The second essay investigates the impact of the method-of-sale on property prices. More specifically, does the same property sell for the same price under auction versus negotiated sale? Applying the Heckman two-step estimation procedure to test and correct for selectivity bias, we find that on average, properties sold through auction have a price premium of 8.2%. We also find that the auction mechanism does not obtain consistent price premiums for the different property types. More homogeneous properties (apartments) obtain higher price premiums than more heterogeneous properties (such as single-family dwellings) when sold through auction.The third essay focuses on examining the impact of product heterogeneity on the magnitude of the price spread between auction and negotiated sales. The price spread is the difference between what a property may fetch at an auction versus a negotiated sale. Using atypicality and price variance as measures to quantify product heterogeneity, we find that more atypical properties obtain smaller price spreads. Price variance leads to a smaller price spread in the low-end market segment but to a larger price spread in the high-end market segment.